Patents, Copyrights, and Trademarks: Legal Frameworks for Intellectual Property Protection, Study notes of Economics and Law

Download Patents, Copyrights, and Trademarks: Legal Frameworks for Intellectual Property Protection and more Study notes Economics and Law in PDF only on Docsity! - 1 - Econ 522 – Lecture 6 The first homework in up on the website – due Thursday, February 19 at 1 p.m. SHARP Also, since the HW questions are a bit different from the types of questions I tend to ask on exams, I’ve also posted a few sample exam questions on property law – two from past exams, two old homework problems that “feel more like” exam questions – for when you guys start to review for the first midterm In the last three lectures, we posed four questions for property law to address, and took a crack at answering each of them: • What things can be privately owned? o Efficiency suggests private goods should be privately owned, to avoid the tragedy of the commons o and public goods should be publicly provided or regulated, so they will be supplied at the efficient level (to avoid underprovision due to freeriding) • What can (and can’t) an owner do with his property? o Maximum liberty – can do anything you want that doesn’t cause an externality (infringe on others’ rights/property) o When two parties’ rights conflict – as with the rancher and the farmer – Coase suggests whose rights prevail doesn’t matter for efficiency, as long as the rights are tradable and there are no transaction costs • How are property rights established? o Other than whaling and Pierson v. Post, we haven’t said much about this, but we’ll come back to it soon • What remedies are given when property rights are violated? o Discussed this Tuesday – mostly, comparing injunctive relief (property rules) to damages (liability rules) o Calabresi and Melamed: property rules (injunctions) are more efficient when transaction costs are low; liability rules (damages) are more efficient when transaction costs are high o Cooter and Ulen: efficient rule depends on what type of information is more readily available For the next three lectures, we’ll discuss applications – looking both at how the law is actually designed, and at whether there is an economic rationale for it. Docsity.com - 2 - To start, I want to introduce one more important idea from game theory, which is the idea of sequential rationality in dynamic games. A dynamic game is a game in which one player moves first, then the other player, after seeing what his opponent did, moves second. Dynamic games are generally presented via a game tree, where each node of the tree represents a situation where someone has to make a decision • Example: suppose there is one firm already operating as a monopolist in some market, and another firm is considering entering • If he does enter, than the incumbent firm has two choice: he can play nice, ensuring that both firms end up making money; or he can start a price war, ensuring that both firms end up losing money • We can represent the game this way: • A strategy in this type of game is a plan of what to do at each juncture • So even if firm 1 doesn’t enter, we need to know what firm 2 planned to do if he did enter • We can also represent this game with a payoff matrix: Firm 2’s Action: Accommodate Fight Firm 1’s Action: Enter 10, 10 -10, -10 Don’t Enter 0, 30 0, 30 • And we can circle each firm’s best-response to each action by the other • We find there are two (pure-strategy) Nash equilibria: (Enter, Accommodate), and (Don’t Enter, Fight). • However, (Don’t Enter, Fight) isn’t that believable as a prediction o Firm 1 has no incentive to enter if he believes firm 2 really would fight o But would it really make sense for firm 2 to fight if it got to that point? o We say that “fight” here is not a credible threat, since once firm 1 had entered, firm 2 would actually be better off accommodating FIRM 1 Enter Don’t Enter FIRM 2 Accommodate Fight (10, 10) (-10, -10) (0, 30) Docsity.com - 5 - • So now suppose a firm is deciding whether to make the initial investment in developing a new drug • They move first, and then another firm moves second and decides whether to imitate it • Suppose monopoly profits in the market would be $2500, the drug costs $1000 to develop, but that with two firms, price competition would drive down profits to $250 each • We can write the game tree this way: • If we do backward induction, we find that the only subgame perfect equilibrium is for the second firm to enter if the first develops the product; and therefore, for the firm not to develop the product • A patent is one way to solve this problem • A patent is basically a legal monopoly – a patent prevents the second firm from imitating the first firm’s product, allowing the first firm to function as a monopolist for a predetermined amount of time o In the U.S., patents last 20 years from the time of application. • So if the firm’s invention were be protected by a patent, the firm can count on receiving several years of monopoly profits; which may be enough to cause them to innovate in the first place. • (Modify the game tree by imposing a large penalty on the imitating firm – the new SPE is now innovation.) • A key thing to remember: monopoly is inefficient! • Monopoly pricing always involves a deadweight loss, since a monopolist maximizes profits by setting price higher than marginal costs • For example, suppose demand for the new drug is Q = 100 – P (DRAW IT) • Suppose the monopolist has 0 marginal costs; then he sets monopoly price at 50, sells to half the market, gets profit of 2500 and generates consumer surplus of 1250 FIRM 1 Innovate Don’t Innovate FIRM 2 Copy Don’t Copy (-750, 250) (1500, 0) (0, 0) Docsity.com - 6 - • But there’s a deadweight loss of 1250 – if the drug were sold for free, it would generate total surplus of 5000 (all of it going to consumers in this case) • But if the drug were going to be sold free, or cheaply, it might never have been developed in the first place • So patents trade off one sort of inefficiency for another. • That is, patents solve the dynamic inefficiency – not enough drugs being developed – by introducing a static inefficiency – monopoly pricing once the drug has been developed • (Of course, once the innovation has occurred, the incentive problem has been solved, and the inefficiency from the monopoly remains, and can sometimes look pretty undesirable. • There’s been lots of talk in recent years about the cost of AIDS drugs, most which are protected by patents. • The manufacturers are pricing them high, to maximize their profits or, arguably, to recoup the investments they made to develop the drugs in the first place • But it’s hard to not notice that pills which can be produced at a marginal cost of pennies are priced high enough that they are not available to much of the developing world. • There have been a number of proposals to try to make them available cheaply (at cost) in developing countries, but the challenge is how to do that without undermining profits in the U.S. and Europe) Docsity.com - 7 - A little bit of history • The power of Congress to legislate both patents and copyrights was actually written into the Constitution • The first patent law was passed in 1790, and has been updated several times since • At present, patents last for 20 years from the date of application • To be approved, a patent application must satisfy three conditions o they must be for something which is novel (new), non-obvious, and has practical utility (basically, is commercializable) • Applications are reviewed by the patent office, which handles a huge volume and is therefore sometimes criticized for granting patents too easily • In particular, in recent years, there’s been criticism that the “non-obvious” test had not been applied o Amazon, for instance, was granted a patent on “one-click purchasing”, which many thought was an obvious extension of online shopping. • A patentholder who feels his patent has been violated can sue both for damages already done and for an injunction, stopping the violator from future violations • Thus, patents are protected both by injunctive and damages relief • Patentholders are also free to license their patents to others, that is, to allow others to use them for a fee (called a royalty). • When you apply for a patent, the details of your innovation go into the public record, so in some industries, firms choose not to patent new inventions, instead choosing to keep them secret. • There are two important degrees of freedom in patent law: how broad a patent is, and how long it lasts • The question of breadth can be thought of in a couple of different ways. • First, suppose two different firms are developing distinct, but similar, products • A broad patent on one of the products might cover both • Thus, in a world with broad patents, the two firms might engage in a race – both try hard to develop the product very quickly, since whoever applies for the patent first will get all the gains from both products • On the other hand, a narrow patent on one product might not cover the other; in which case, the firms might develop the products slower (and less expensively), knowing that both products will exist and that neither one will really have a true monopoly • So the breadth of patents affects the intensity of the research effort. Docsity.com - 10 - • Of course, even when low transaction costs would lead to cooperative outcomes, this can sometimes be a problem in other ways • Often times, firms doing similar research are also competitors in the market; so attempts to cooperate (through joint research projects or in other ways) may be viewed suspiciously by antitrust authorities. • (A paper I wrote last year was on patent pools - … Much of the interest in patent pools stems from the need to figure out how they should be viewed by antitrust regulators.) • There is also the question of how long a patent should last • Obviously, patents must last long enough for firms to be able to recover their investment costs, in order to give sufficient incentives for innovation • But since monopolies are inefficient, having patents last too long is bad – once the patent expires, competition will drive down the price of the product, eliminating the deadweight loss. o (When drug patents expire, for example, competing firms can begin selling generic versions of the same drug – the book gives an example where the price per pill dropped immediately from $15 to $1, and I think that’s pretty typical.) o So the optimal length is a tradeoff between maintaining ex-post inefficiency versus creating a sufficient incentive for innovation. o Clearly, the optimal level is likely to vary across different industries o In the U.S., all patents last the same amount of time, 20 years o Jeff Bezos, the founder of Amazon, proposed that, since innovation occurs so fast in the software industry, software patents should expire after 3 years o In Germany, there are two different types of patents: full-term patents, which are granted for major inventions; and petty patents, granted for minor inventions and improvements, which last 3 years o In addition, in Germany, patentholders must pay an annual fee to continue the patent, which starts out cheap but escalates over time o In the U.S., patents used to be renewable under certain conditions – I believe now they are not.) • Of course, a patent system is not the only way to encourage innovation; and given the inefficiency inherent in a monopoly, there may be other ways to do it better • One proposal with drug patents has been that when a particularly valuable drug is invented, the government should buy the patent, and then allow multiple firms to produce the drug, leading to lower pricing and higher overall welfare • Since the government could pay the fair value (say, the discounted present value of expected monopoly profits) to the firm, there is no problem of incentives Docsity.com - 11 - • The question then becomes how to correctly calculate the economic value of the patent itself • (One proposal was to let the market decide – hold an auction for the patent, with the understanding that once the auction was complete, a coin would be flipped; with a high probability, the government would buy the patent at that price, but with some probability, the winner of the auction would buy the patent • This way, a decent estimate of “fair value” could be obtained, and the deadweight loss associated with monopoly could still be eliminated “most of the time”.) Another way to give incentives for innovation is through prizes • A couple years ago, Google announced a $30 million prize for any private citizen landing a rover on the moon • Similar prizes have been offered by governments, and by private foundations, to encourage innovation in particular directions And finally, government (or a private foundation) can simply give grants to subsidize research directly – which they do – reducing the need for ex-post incentives. So that’s patents. Next up are copyrights. Copyrights are property rights over “original expressions” – writing, music, or other artistic creations • Creations like this tend to fit the definition of a public good o nonrivalrous – one more person reading a book, or listening to a song, or using a piece of software, doesn’t impose any costs on the creator or on other users o nonexcludable – this isn’t quite as literally true; but technology has made it very cheap, often free, to copy and share music or software, so in some instances it’s very difficult to prevent people from accessing it o (This has become more dramatically true in the last decade – once something is available digitally, it’s very hard to limit access to it.) • So it is natural to think of creations like these in terms of public goods • As with any public good, if they are privately supplied, we would expect them to be undersupplied • That is, without any specific sort of reward system, creators could not capture the full social benefit of their creations, and so the free market would likely produce an inefficiently low level of “original expressions.” Docsity.com - 12 - However, there are several possible ways to remedy this problem: • Have the government subsidize it, that is, have it publicly supplied o This happens with scientific research, since scientific knowledge can also be thought of as a public good; and it happens with art • Another is for these activities to be paid for with charitable donations o This is implicitly what happens with shareware – you download it for free, but are asked to pay for it voluntarily if you use it o (Of course there’s the usual freerider problem.) o And a lot of art is supported by private foundations and donations. • Finally, the creator of a song, or of a computer program, can be given legal rights to it, which make it illegal for others to disseminate it, so that in order to use it legally, people have to buy it from the creator (or from someone else who pays fees to the creator) This last one is the case of copyright – exclusive legal rights to written material. Copyright law is less rigid than patent law • Patents serve as injunctions against any unauthorized use of the idea • But copyright law allows for certain exceptions • For example, a few lectures ago, I handed out Xerox copies of the amputated leg story • The article was copyrighted, but I wasn’t breaking the law by handing out copies, because educational use is recognized as “fair use” of copyrighted material, and is therefore exempt • Similarly, small selections from a book can legally be quoted in reviews, or used in satires, and pieces of songs can be sampled in other songs. On the other hand, copyrights last much longer than patents • the lifetime of a copyright has been extended several times • in the U.S., copyrights currently expire 70 years after the death of the creator Unlike patents, you don’t have to apply for a copyright – it automatically applies to anything you’ve written or created. Docsity.com - 15 - • The name “Aspirin” was once the name of acetacylicilic acid sold by the Sterling Drug Company; in 1921, a federal court ruled that the name had become the common word for the drug, and other companies were allowed to start using the term “aspirin.” • (Bayer currently holds a trademark on the word “aspirin” in Mexico and Canada, where nobody else can sell a product with that name.) • The book also talks about a program by Coca-Cola, which employs 25 “investigators” who order Coke all over the place and analyze what they’re given, in an effort to ensure that people don’t start using the term to refer to any generic soda and destroy the trademark One more funny aside about trademarks… • In 1989, when Toyota introduced the Lexus name (L-E-X-U-S), they were sued by Lexis (L-E-X-I-S), a company that provides searches of legal sources (now Lexis-Nexis, which those of you who go to law school will get to know quite well) • The court ruled for the car company, saying they were not infringing. • The first time I taught this class, I stumbled on an article that for the second time in a year, Toyota was suing a porn star who’s adopted the stage name “Lexus” • Taken together, these seem to suggest that Toyota believes that: • you are unlikely to mistake a luxury car for an online legal search • but you might mistake a luxury car for gay porn • Of course, this isn’t really what they’re claiming • Obviously, trademark law prohibits someone else from selling a soft drink called Coca-Cola • Less obviously, it also prohibits someone else from selling, say, a clothing line or a sandwich meat called Coca-Cola • The legal doctrine here is “dilution of the distinctive quality of a mark or trade name,” which can be claimed even in “the absence of competition between the parties or the absence of confusion as to the source of goods or services.” • That is, once you’ve established a brand name, people can’t use it in a way that hurts its image, even if it doesn’t create genuine confusion about whose products are whose. • The economic argument for trademark protection seemed pretty clear – reduce buyer uncertainty, increase seller incentives to maintain a reputation for quality • The argument against trademark dilution is a bit harder – seems more to be protecting vested interest • But I thought it was interesting Docsity.com - 16 - The final type of legal protection for information is the protection of trade secrets • A trade secret is any information "used in one's business" that gives its owner "an opportunity to obtain an advantage over competitors who do not know or use it." • For instance, the exact formula for Coca-Cola or for the Big Mac “special sauce” are supposedly closely-guarded trade secrets In order to charge someone with misappropriating a trade secret, I have to show three things: • One, that it is a valid trade secret, that is, that it is commercially valuable, and that it was not already commonly known throughout the industry. • Two, that they acquired it illegally. Buying my product and reverse-engineering how I built it is not illegal. However, breaking into my lab and stealing my notes is. • Three, that I took reasonable steps to protect it. Trade secrets behave like property – they can be transferred or sold • The protection does not expire, as long as the secret remains a secret • Trade secret protection is limited, however • Suppose my firm hires an engineer to work on a secret project, and I have him sign a non-disclosure agreement, agreeing not to disclose my secrets • After a while, he quits, and begins working for my competitor • If he reveals my secrets to them, I can sue him for breach of contract • But if my competitor did not know about the contract, I have no recourse against them, and now they have my secret. (Nondisclosure agreements tend to be difficult to enforce. Particularly in Silicon Valley, where people change jobs very frequently, trade secret protection is not felt to be particularly effective. Kozmo/Urbanfetch) Docsity.com