Boldrin + Levine // Against Intellectual Monopoly
Boldrin and Levine’s Against Intellectual Monopoly has been on my list of books to read for a while, and I was excited to finally get around to it (in response to hearing more and more discussions of broadening IP / private property / monopoly rights to cover any sort of data).
I was kind of hoping for a steel man argument for why IP exists at all, followed by a rigorous critique, and then a survey of all the best alternatives.
The book was disappointing in that (1) it has a very dismissive tone — making repeated appeals to the obviousness of the argument it is supposed to be making, eg, “it is already apparent that,” “it should be clear, ” “obviously they claimed,” “obviously they wanted,” “Evidently rock musicians,” etc, rather than just presenting a strong argument for their case and (2) they don’t present an amazingly convincing set of alternatives (though they do have some good suggestions for how to move in the right direction).
Ultimately, the book providing some good background on the history of IP but left me wanting to go think and write about alternatives myself.
Here are some of the bits I found worth noting…
The basic argument in favor of IP that the authors argue against is this: because certain ideas require a large investment (r&d time & money) and are easy to copy, in order to compensate investors/inventors, the government should grant the discoverers a temporary monopoly on their idea so that they can charge enough money to recoup their investment cost. The authors argue that IP laws do not actually serve this goal of increasing innovation / creation, and they continually make a distinction between the idea and a copy of an idea:
We do not know of any legitimate argument that producers of ideas should not be able to profit from their creations. Although ideas could be sold in the absence of a legal right, markets function best in the presence of clearly defined property rights. We should protect not only the property rights of innovators but also the rights of those who have legitimately obtained a copy of the idea, directly or indirectly, from the original innovator. The former encourages innovation; the latter encourages the diffusion, adoption, and improvement of innovations.
Why, however, should creators have the right to control how purchasers make use of an idea or creation? This gives creators a monopoly over the idea. We refer to this right as “intellectual monopoly,” to emphasize that it is this monopoly over all copies of an idea that is controversial, not the right to buy and sell copies. The government does not ordinarily enforce monopolies for producers of other goods. This is because it is widely recognized that monopoly creates many social costs. Intellectual monopoly is no different in this respect. The question we address is whether it also creates social benefits commensurate with these social costs.
On the origin of copyrights and patents:
Copyright emerged in different European countries only after the invention of the printing press. Copyright originated not to protect the profits of authors from copyists or to encourage creation, but rather as an instrument of government censorship. Royal and religious powers arrogated to themselves the right to decide what could and could not be safely printed. Hence, the right to copy was a concession of the powerful to the citizenry to print and read what the powerful thought proper to print and read; Galileo’s trial was nothing more than an exercise in copyright enforcement by the pope of Rome.
Later on, and mostly in the eighteenth century, in parallel with the diffusion, for the same purpose, of royal patents, copyright concessions began to be used as tax instruments. Selling a copyright, exactly like selling a patent, amounted to giving monopoly power to someone in exchange for bribing the royal power. The creation, in the United Kingdom, of the Stationers’ Company, with virtual monopoly over printing and publishing, is probably the best-known example of such practice. There is no evidence, from the United Kingdom or from other European countries, such as the Republic of Venice, which adopted similar laws, that they provided any particular boost to either literary creation or the spread of literacy.
Exploration of pornographic media as an example of what to expect in less IP-constrained industries. The pornography industry is more technologically innovate:
If we compare the pornographic movie and entertainment industry to its legitimate counterpart, we find an industry that is more innovative, creates new products and adopts new technologies more quickly, and for which the reduction in distribution cost has resulted in more output at lower prices and a more diverse product. We also find an industry populated by many small producers and no dominant large firms capable of manipulating the market either nation- or worldwide. European intellectuals and politicians, obsessively fearing colonization by American movies and music, should take note: strengthening copyright protection, as you are all advocating, may just make you a couple of euros richer and a lot more intellectually colonized.
And has less variance / superstardom:
Finally, in pornography we find an industry in which “stars,” be they actresses and actors or directors, earn a good living but are far from accumulating the fabled fortunes of the stars of its monopolistic counterparts. The evidence shows that porn stars make many more movies and earn between one and two orders of magnitude less, overall, than regular stars. In other words, they work more and make less money. This may seem a bad feature of the nonprotected industry, but from a social point of view it need not be. Indeed, it is the other side of the fact that more and cheaper porn movies are available. The stars of the porn movie industry are simply a lot closer to earning their “opportunity wage” — economic parlance for what they would be earning, given their skills and prevailing market conditions, in their best alternative occupation — than are the stars of the legitimate movie industry.
Organizing markets and industries in such a way that goods and services are provided while factors of production, either labor or capital, earn no more than their opportunity cost is what a socially desirable policy should aim to achieve.
The authors also cite all of human history that predates IP as evidence of creative works being produced with the guarantee of IP:
Nobody, unfortunately, has yet written a historical book on competitive creation, but any survey of literature and writing will enable readers to gather an idea of how much creation took place, over two thousands years, absent intellectual monopoly.
The origins of patent law (in regulatory capture):
It was English Parliament that, in 1623, pioneered patent law in its modern version with the aptly named Statute of Monopolies….
The statute, therefore, replaced the super-monopolistic power of expropriation and arbitrary grants of monopoly the Crown had enjoyed until then, with the milder temporary monopoly actual inventors would receive from Parliament. This, no doubt, represented progress in terms of private property rights and incentives to private economic initiative. Further, the range of products to which patent protection could and would be given was greatly reduced, as it was restricted to actual inventions (that is, forget the monopoly of salt) that satisfied the tight requirement that “they be not contrary to the law nor mischievous to the state by raising prices of commodities at home, or hurt of trade, or generally inconvenient.
Until these formal laws were introduced, patents and copyright were nonexistent, were used as a form of governmental extortion through the sale of economic privileges, or were a tool for harassing scientists and philosophers, as Galileo and many others across Europe were forced to learn. Insofar as the British system of patent was helpful in inducing the Industrial Revolution, it is likely that the limitation it placed on the arbitrary power of government to block and monopolize innovation was the most important factor.
A few crazy examples of food-IP:
The battle over who controls the world’s food supplies has escalated dramatically with the Indian government launching a legal challenge in the United States against an American company which has been granted a patent on the world-renowned basmati rice. It is thought to be the first time a government in a developing country has challenged an attempt by a US company to patent — and thus control the production of — staple food and crops in what campaigners dub the “rush for green gold.” Basmati rice, sought-after for its fragrant taste, was developed by Indian farmers over hundreds of years, but the Texan company RiceTec obtained a patent for a cross-breed with American long-grain rice. RiceTec was granted the patent on the basis of aroma, elongation of the grain on cooking and chalkiness. However, the Indian government last week filed 50,000 pages of scientific evidence to the US Patents and Trademarks Office, insisting that most high quality basmati varieties already possess these characteristics. The US Patent and Trademarks office accepted the petition and will re-examine its legitimacy. The patent — granted only in the [United States] — gives RiceTec control over basmati rice production in North America. Farmers have to pay a fee to grow the rice and are not allowed to plant the seeds to grow the following year’s crops. India fears the patent will severely damage exports from its own farmers to the [United States]. In 1998, they exported almost 600,000 tonnes of basmati rice.
Another surprising example of American intellectual over-reach is in — not so surprising — Iraq:
The American Administrator of [Iraq] Paul Bremer, updated Iraq’s intellectual property law to “meet current internationally-recognized standards of protection.” The updated law makes saving seeds for next year’s harvest, practiced by 97% of Iraqi farmers in 2002, the standard farming practice for thousands of years across human civilizations, newly illegal. Instead, farmers will have to obtain a yearly license for genetically modified seeds from American corporations. These GM seeds have typically been modified from IP developed over thousands of generations by indigenous farmers like the Iraqis, shared freely like agricultural “open source.” Other IP provisions for technology in the law further integrate Iraq into the American IP economy.
The old Communists like Lenin used to argue that monopolistic capital breeds war because it needs the support of the imperialistic state to acquire new markets and grab economic resources.
A short history of publishers lobbying for longer and longer copyright terms:
A critical shift in the political balance occurred in the 1880s as the older American publishing houses on the east coast began to see their profits eroding in the face of a new generation of mass penny-press publishers, expanding especially in the midwestern states, who undercut their costs and reached yet wider markets. In the face of this challenge the older houses reshaped their business strategies and their arguments about intellectual property. They now realized that they would be better positioned than the new generation of publishers to sign exclusive copyright agreements with foreign authors that would be enforceable within the United States. The signing of the Berne Convention in Europe in 1886 added further momentum to a shift in the views of major publishing houses like Harper’s and Scribner, who recognized the advantage of the movement for American adherence to some form of international agreement, at least with England. American theologians, including the Reverend Isaac Funk, now denounced the “national sin of literary piracy” (which had allowed him to make his fortune on his pirated “Life of Jesus”) as a violation of the seventh commandment. And their voices resounded on the floor of Congress. Although Congress refused to sign the Berne Convention on the grounds that American law did not recognize authors’ natural rights, in 1891 an international agreement with England for reciprocal copyright protection was finally signed by Congress.
This was the beginning of the everlasting expansion and increase in copyright. The monopolists put further screws to the public with another major revision of the U.S. Copyright Act in 1909. This broadened the scope of categories protected to include all works of authorship. The copyright term had been fourteen years with a possible renewal of fourteen years until 1831, when it was extended to twenty-eight years plus a fourteen-year renewal. The 1909 act further extended the renewal period to twenty-eight years. Today, the length of copyright term is ninety-five years for works for hire, and the life of the author plus seventy years otherwise. In addition to these increases in the length of copyright term, media lobbyists have succeeded in recent years in enormously increasing the penalties for copyright violations, now a criminal as well as a civil offense. Additional laws are being pushed, ranging from mandating hardware protection in general-purpose computing equipment — something we will later describe as a policy blunder — to allowing large media corporations to hack into computers without legal liability, which could better be described as criminal insanity.
Why extending copyright term lengths for existing works is pure rent-seeking (this I very much agree with):
Extending the length of copyright for works that have already been produced can scarcely make them more likely to be produced. The goal of this legislation is, of course, not to increase creativity. What it means is that all the books, music, and movies that you purchased with your hard-earned money, and that you would have owned outright when the copyright expired, will instead continue to be owned by the big media corporations.
And some napkin math on the social cost of this rent-seeking legislation:
During the lawsuit, interesting information about the social cost of the copyright extension emerged.
Some numbers will put this change in context. Between 1923 and 1942, there were approximately 3,350,000 copyright registrations. Approximately 425,000 (13%) of these were renewed. The Congressional Research Service (CRS) estimated that of these, only 18%, or approximately 77,000 copyrights, would constitute surviving works that continue to earn a royalty. The annual royalties for one segment of those surviving works, books, music, and film … will be, CRS estimates, approximately $317,000,000…. [B]ecause of CTEA, the public will both have to pay an additional $317 million annually in royalties for the approximately 50,000 surviving works, and be denied the benefits of those and 375,000 other creative works passing into the public domain in the first 20 years alone. (Today, the proportions would be far more significant, since there is no renewal requirement that moves over 85% of the works copyrighted into the public domain. Under current law, 3.35 million works would be blocked to protect 77,000.)
One of my main problems with IP legislation — it’s a ‘pay to play’ game, that puts wealthy individuals/corporations at an advantage over everyone else:
It doesn’t matter that the RIAA has been wrong about innovations and the perceived threat to their industry, EVERY SINGLE TIME. It just matters that they can spend more than everyone else on lawyers.
Some of their argument about how IP differs from physical property:
Owning a piece of land is not equivalent to controlling all pieces of land: plenty other people also own land, which carries the right to improve it without asking for permission. Ordinary property involves the same set of rights when applied to copies of an idea: you may do whatever you like with your copy of an idea without preventing others from doing what they like with their copies of the same idea or with its derivatives.
Copies of ideas are always limited, and it is always costly to replicate them, which is why they are valuable and why they should enjoy the same protection afforded to all kinds of property.
I pretty strongly disagree with the “it is always costly to replicate them” — it is pretty cheap, for example, to copy a file — a song, or movie, or book, and this is precisely why we may want to classify ideas / data / information differently than physical property.
I like this concise definition of rent:
Price is more than marginal cost. The difference between the price and marginal cost is called competitive rent.
Again, below, they make an argument about digital goods that I just don’t buy:
What is true for shoes is also true for ideas. It is no more possible to flood the world instantaneously with copies of an idea than it is to produce an infinite number of shoes from a finite-sized factory. Because copies of ideas are always limited, like shoes, they always command a positive price.
It is far easier to flood the idea with copies of a file than with shoes. They later concede this point later:
In contrast to shoe factories, even with minimal installed capacity, the copies of a book that can be made over an extremely short period of time may be so many as to essentially flood the market, dropping the price to near marginal cost almost immediately. (We should note that the evidence suggests that this is not the case.) The resultant difference between price and marginal cost may be so small that, when multiplied by the number of copies, it yields an insufficient rent. The rent is insufficient because, say, the book is very complicated, and it took a long time to complete. There is no way to offset this combination of excess capacity and large fixed cost by producing a smaller book that is a good substitute for the complete book; this is something we can bear witness to. The presence of such an indivisibility in the innovation process and the fact that initial capacity may be large relative to the size of the market is a key fact about innovation under competition.
The argument for IP laid out in more detail:
Most ideas are not divisible, and there are cases in which the cost required to come up with the first prototype of an idea is quite large compared to the size of the market for copies of that idea. Said differently, the capacity the innovator must install (more often, the capacity that is already installed) is so large, given the demand for the good, that one is not likely to earn any rent over marginal cost. In this case, a rational innovator understands that she cannot recover the initial fixed cost, and she does not even get started. For a given demand, when these two anomalies — large minimum capacity and large fixed cost — meet, competitive markets do not function properly. This is the heart of the economic argument for intellectual monopoly: that the additional profit achieved by a monopolist may, some of the time, lead to socially desirable innovations that would not be produced with unfettered competition. Let us be clear: as a theoretical argument this is a sound one and we would not dream of denying it. In fact, it is a special case of the very same model we have proposed both here and elsewhere. We are not arguing the case of large initial capacity and small market size cannot arise, just that it is far from being the only possible case. Determining which one is more frequent in the real world is an empirical problem, not a theoretical one. The theory of competitive innovation admits both the case in which the minimum size is small and the indivisibility irrelevant and the case in which it is relevant.
The authors continue:
Is indivisibility a relevant practical problem? As we have already seen and as we shall see even more, available evidence suggests that it is not. Notice that, as a matter of both theory and facts, when the economy expands in size, the economic relevance of indivisibility is progressively reduced — so, too, as people become richer over time. Hence, economic progress makes competitive innovations easier and easier, and the economic justification for intellectual monopoly diminishes as time passes and the economy grows.
I’m not sure I agree with this point that innovation becomes easier and easier over time. The opposite seems more likely to be true to me — innovation becomes harder and harder over time as all of the easy ideas get invented.
This throwaway comment identifies some alternatives to IP, viz, consumer loyalty / brand reputation / marketing:
In short, even without the benefit of legal protection, the innovator certainly will enjoy a short-term monopoly and can depend on such forces as reputation and consumer loyalty working to her advantage.
More on the math behind IP law:
The traditional logic is one of fixed cost and constant marginal cost. The cost of innovation is a fixed cost — ideas are expensive to produce. Once discovered, ideas are distributed at a constant marginal cost.
I am not sure I buy their arguments that first mover advantage as sufficient compensation for innovation investment, because (1) digital goods can easily be costlessly and instantly copied and (2) even for non-digital goods, fast followers with better marketing and distribution channels are likely to sieze all the demand:
Leaving aside the, possibly too theoretical, observation that the logical argument works only if the marginal cost is truly constant and fails in the more generally accepted case in which it is increasing, the fixed cost plus constant marginal cost argument fails along two more substantive dimensions. First, as a matter of theory, perfect competition forces goods to be priced at marginal cost only in the absence of capacity constraints — and, as we just argued at length, the rents generated by capacity constraints along with other first-mover advantages can and do lead to thriving innovation. Pricing at marginal cost is a prediction for the long run, which applies only once capacity constraints are no longer binding. Erecting a theory of economic growth on the flimsy assumption that productive capacity always builds costlessly and instantaneously seems like a risky proposition, at least in a world where scarcity still reigns supreme. Second, as a practical matter, in most industries and for most innovations the short run is what matters to make money; when the long run comes, your innovation has probably already given way to an even newer one. Focusing the attention of the theory on the long-run equilibrium and bypassing the study of the short-run dynamics when capacity constraints are binding yields a formally elegant model with, unfortunately, little or no practical relevance. In spite of our dislike of Keynesian monetary economics, John Maynard Keynes’s dictum, “in the long run we are all dead,” does seem to apply to new growth theory.
I tend to agree more with Hal Varian here than the authors. While it is true that technology decreases the cost of producing the same quality of ‘production value’ goods, I don’t think it decreases the intellectual effort / cost of creating new and really valuable information goods:
As Hal Varian says, “One prominent feature of information goods is that they have large fixed costs of production and small variable costs of reproduction. Costbased pricing makes little sense in this context; value-based pricing is much more appropriate.” In fact technological change is reducing the fixed cost for many creations, especially in music and movies, and value-based pricing here means a higher, and hence more distortionary, price. As the economy expands, there is less need for these price distortions, and we may hope that intellectual monopoly will eventually join communism on the scrap heap of history.
The authors argue against the idea that there are maintenance costs to public domain works. While perhaps this is not true for a book (tho keeping a usable copy of the book available for print/download is a small cost), there are definitely maintenance costs to things like open source software. In fact, one of the chief problems in the open source world is not the creation of new libraries, but maintenance and upkeep of older, larger projects. So again, I disagree with their argument here:
This is the myth that ideas in the public domain are like common pastures. Because of this, it is argued, the public domain suffers from congestion and overuse, and intellectual property rights are necessary to provide appropriate incentives to “maintain” existing works.
This is a fascinating digression on the incentives and economics of information flow around products (perhaps my favorite idea in the book):
It is worth reflecting briefly on promotional activities in competitive industries. Surely information about, say, the health benefits of fish, is useful to consumers; equally surely no individual fisherman has much incentive to provide this information. Is this some form of market failure? No — in a private ownership economy consumers will have to pay for useful information rather than have it provided for free by producers. And pay they do — doctors, health advisers, magazine publishers, all provide this type of information for a fee. There is no evidence that competitive markets underprovide product information. Rather, in the case of monopolists, because the value of the product mostly goes to the monopolist rather than the consumer, the consumer has little incentive to acquire information, while the monopolist has a lot of incentive to see that the consumer has access to it. So, we expect different arrangement for information provision (that is, promotion) in competitive and noncompetitive markets. In the former, the consumer pays and competitive providers generate information. In the latter, firms subsidize the provision of information. Of course, the monopolist, unlike the competitive providers, will have no incentive to provide accurate information. We rarely see Disney advertising that, however true it might be, the new Mickey Mouse movie is a real dog, and we should go see the old Mickey Mouse movie instead.
Here is an interesting argument about the second order consequences to the cost of innovation created by IP:
In the long run, intellectual monopoly provides increased revenues to those that innovate, but it also makes innovation more costly. Innovations generally build on existing innovations. Although each individual innovator may earn more revenue from innovating if he has an intellectual monopoly, he also faces a higher cost of innovating: he must pay off all those other monopolists owning rights to existing innovations. Indeed, in the extreme case when each new innovation requires the use of lots of previous ideas, the presence of intellectual monopoly may bring innovation to a screeching halt.’
Additionally, intellectual monopoly provides the incumbent with a dominant position that discourages competitors from entering, thereby reducing the incentive for the incumbent to innovate to keep ahead. In part, this is because innovations build on existing innovations; hence, the monopolist can use high prices to make new innovations too expensive for competitors. In part, this is because monopolists generally face lower costs of “matching” whatever improved new product entrants may come up with. Notice that, in both cases, it is the discouragement effect that matters: this implies less effective contestability, and hence less innovative effort.
An important point to remember when considering IP from a global perspective, viz, stronger IP law attracts foreign capital and leads to increased tax revenue for the govt — note the game theoretic / arms race dynamic they point out at the end of this passage:
They also find evidence that, in countries with initially weak IP regimes, strengthening IP increases the flow of foreign investment in sectors where patents are frequently used.
This is an important point, which deserves a separate comment. In a world in which strong patent protection in some countries coexists with weak protection in others, a country that increases patent protection should observe an increase in the inflow of foreign investment, especially in those sectors where patented technologies are used. Profit-maximizing entrepreneurs always choose to operate in those legal environments where their rights are the strongest. In the United States, for example, economists and people with common sense alike have long argued that the policy of offering tax incentives and subsidies to companies that relocate in one state or another is not a good policy for the United States as a whole. Nobody denies that if you provide a company with high-enough subsidies and tax incentives, it will probably take them and relocate to your state, at least temporarily. The problem is that, after you do so, other states will respond by doing the same, or more. In the ensuing equilibrium, the total amount of investment is roughly the same as when no one was offering a subsidy, but everyone is now paying a distorting tax to finance the subsidy. When capital moves freely across countries, the very same logic applies to the international determination of IP rights. In what economists call the Nash equilibrium of this game, it is obvious that patent holders prefer to locate in countries with strong IP laws. This increases the stock of capital in the receiving country and reduces it everywhere else, especially in countries with low IP protection. Hence, absent international cooperation, there is a strong incentive for most countries to keep increasing patent protection, even in the absence of lobbying and bribing by intellectual monopolists.
Opinions differ on the relationship of IP protection with R&D as a percentage of GDP:
As for the study by Kanwar and Evenson, they have data on thirty-one countries for the period 1981–90. Using two five-year averages, they find support for the idea that higher protection leads to higher R&D as a fraction of GDP. Their measures of IP protection do not always seem to make sense, but this is not the proper place to engage in a statistical diatribe. There are five levels of IP protection, and R&D as a fraction of GDP ranges from a ten-year average of.231 percent in Jordan to 2.822 percent in Sweden. They find that increasing protection by one level raises R&D as a fraction of GDP between 0.6 percent and 1 percent. As before, the most favorable interpretation of this result is that countries offering higher levels of IP protection also attract investments in those sectors in which R&D and patents are most relevant. A less favorable interpretation of this result, instead, points out that Kanwar and Evenson have forgotten to include a main determinant of the ratio of R&D to GDP: that is, market size as measured by GDP. The most elementary theory of innovation, either under competition or monopoly, shows that the innovative effort is increasing in the size of the market, and that large and rich countries will invest a larger share of their GDP in R&D than will small and poor countries. Putting Kanwar and Evenson’s data together with GDP data from the 1990 CIA World Fact Book, we find that a 1 percent increase in the size of a country as measured by GDP increases the ratio of R&D to GDP by 0.34 percent.
Some findings on non-compete-agreements that may provide a lens for thinking about how to compare looser with tighter IP laws:
Route 128 began the race well ahead. In 1965, total technology employment in the Route 128 area was roughly triple that of Silicon Valley. By 1975, Silicon Valley employment had increased fivefold, but it had not quite doubled in Route 128, putting Silicon Valley about fifteen percent ahead in total technology employment. Between 1975 and 1990, the gap substantially widened. Over this period, Silicon Valley created three times the number of new technology-related jobs as Route 128. By 1990, Silicon Valley exported twice the amount of electronic products as Route 128, a comparison that excludes fields like software and multimedia, in which Silicon Valley’s growth has been strongest. In 1995, Silicon Valley reported the highest gains in export sales of any metropolitan area in the United States, an increase of thirtyfive percent over 1994; the Boston area, which includes Route 128, was not in the top five.
What explains this radical difference in growth of the two areas? Certainly both had access to important universities, which are instrumental in the computer revolution — Harvard and MIT in the case of Route 128 and Stanford in the case of Silicon Valley. A careful analysis by Ronald J. Gilson shows that the only significant difference between the two areas lay in a small but significant difference between Massachusetts and California labor laws. According to Gilson:
A postemployment covenant not to compete prevents knowledge spillover of an employer’s proprietary knowledge not, as does trade secret law, by prohibiting its disclosure or use, but by blocking the mechanism by which the spillover occurs: employees leaving to take up employment with a competitor or to form a competing start-up. Such a covenant provides that, after the termination of employment for any reason, the employee will not compete with the employer in the employer’s existing or contemplated businesses for a designated period of time — typically one to two years — in a specified geographical region that corresponds to the market in which the employer participates.
If you don’t love IP protection, it is worth playing out the thought experiment of what would happen if we did away with it. Everything might devolve to marketing competition. This is not really the point the authors are making here, but it comes to mind as a corollary:
British and French synthetic dye firms that initially dominated the synthetic dye industry because of their patent positions but later lost their leadership positions are important cases in point. It appears that these firms failed to develop superior capabilities in production, marketing and management precisely because patents initially sheltered them from competition. German and Swiss firms, on the other hand, could not file for patents in their home markets and only those firms that developed superior capabilities survived the competitive home market. When the initial French and British patents expired, the leading German and Swiss firms entered the British and French market, capturing large portions of sales at the expense of the former leaders.
See also (would removing IP protection lead to even more money spent on marketing vs R&D?):
A company such as Novartis (a big R&D player relative to industry averages) spends about 33 percent of sales on promotion and 19 percent on R&D.
One alternative to granting monopoly rights to inventors would be public funding for research. The authors propose exactly this for the cost of clinical trials (which comprise a large portion of the R&D costs in medical/pharma):
The cost of clinical trials cost would better paid from the public purse, for example, by competitive and peer-reviewed National Institutes of Health grants — at which point patents on drugs would no longer have any reason to exist.
Another pretty interesting alternative they suggest is just capping the returns earned on IP:
An alternative reform would be to require mandatory licensing at fees based on estimates of R&D costs. The principle is the following: if it costs $100 to invent a gadget, 10 percent is a reasonable rate of return on this type of investment, and expected demand for licensing is on the order of one hundred units, then a net present value fee of $1.10 would be right. Toss in an extra $0.05 for the uncertainty and set mandatory licensing at a fee of $1.15 for this particular patent. William Kingston takes a more serious look at how this might work in practice, particularly figuring a multiple to account for the many failed innovations needed to produce a successful one. Kingston points out that cost estimates are already widely used in patent litigation and are not so difficult to produce and document. He estimates that, for most of the cases he studied, the total revenue from licensing products that are successfully patented and licensed should be about eight times their R&D cost, if the license is taken immediately; for licenses issued as the products actually go to market, a multiple of four would be more appropriate. In the case of pharmaceuticals, he suggests a multiple of two would be sufficient, noting, “If three such licenses were taken, the payments would [already] put the product into the most profitable decile (the home of the blockbuster drugs).”
The authors are opposed to any sort of ‘pay for access’ to an idea model, suggesting only final sales make sense. I understand their line of argument, but seems untenable if only 1 person can ‘own’ a song or book for example (with the exception of the public domain owning):
For intellectual property, the reverse is the socially beneficial arrangement: allow the permanent sale but ban the rental. Again, this is efficient because it minimizes transaction costs. For, with intellectual property, possession belongs to the buyer and not to the seller. If you sell me a copy of an idea, I now have that idea embodied either in me or in an object I own. For you to control the idea requires intrusive and costly supervision of my private sphere — similarly, if you sell me a book, a CD, or a computer file. In each case, I have physical control of the item, and you can control its use only through intrusive measures. Moreover, in the case of well-functioning markets, owning is a good substitute for renting. Our basic argument against intellectual monopoly is that markets will function well in its absence, and so there is no need for a rental market as the latter only effectuates intellectual monopoly.
Below are some of their more interesting suggestions for IP reform / alternatives…
Clinical trial results become public goods and are available, possibly for a fee covering administrative and maintenance costs, to all who request them. This would not prevent drug companies from deciding that, for whatever reason, they carry out their clinical trials privately and pay for them; that is their choice. Nevertheless, allowing the public financing of stages 2 and 3 of clinical trials — by far the largest component of the private fixed cost associated with the development of new drugs — would remove the biggest (nay, the only) rationale for allowing drugs’ patents to last longer than a handful of years.
Begin reducing the term of pharmaceutical patents proportionally. Should we take pharmaceuticals’ claims at their face value, our reform eliminates between 70 percent and 80 percent of the private fixed cost. Hence, a patent’s length should be lowered to four years, instead of the current twenty, without extension. Recall that, again according to the industry, effective patent terms are currently around twelve years from the first day the drug is commercialized; hence, we propose to cut them down by two-thirds, which is less than the proportional cost reduction. To compensate for the fact that NIH-related inefficiencies may slow down the clinical trial process, start patent terms from the first day in which commercialization of the drug is authorized.
Interesting comment about some of the perverse incentives in global pharma:
Furthermore, we cannot help but notice the obvious, if cynical, economic point: only when the worldwide gains from price discrimination are low enough will large pharmaceutical companies find it attractive to get seriously involved in the development and production of new drugs specifically targeted to the many diseases plaguing the poor countries of Africa, Latin America, and so on. What this means is that reforming the pharmaceutical markets of the United States, Europe, and Japan in the direction we indicate is, in fact, almost a prerequisite to make sure that we can effectively address the health problems of the less developed countries in a systematic and not purely charitable way. Charity is commendable, useful, and valuable, but history has taught us, over and again, that charity has never eradicated and never will eradicate either poverty or widespread plaguelike diseases. Free competitive markets and the technological innovation they foster are a much more effective and well-tested medicine than any, temporary and charitable, partial reform of the global system of pharmaceutical patents.
Interesting (non-obvious to me) comparison of subsidies with prizes as incentives for innovation:
Like monopolies, subsidies can lead to rent seeking and have distortionary effects, so they should scarcely be a first resort. Some economists, such as Paul Romer, painfully aware of these negative side effects, have proposed to avoid some of these distortions by narrowly targeted subsidies — for example, to graduate students, who, the evidence suggests, are key instruments in the process of innovation. Others, such as Andreas Irmen and Martin Hellwig, suggest that broad subsides to investment in general- interest-rate subsidies, for example — are likely to be the least distortionary. Yet others, such as Michael Kremer, suggest that prizes awarded after the fact create greater incentives to innovate. Nancy Gallini and Suzanne Scotchmer go further and compare various subsidization methods in their recent work. Their technical analysis is beyond the scope of this book, but the bottom line remains: various intelligent forms of subsidizing basic research and even applied invention exist, and an appropriate mix can be found that would greatly improve upon patents and copyright.
I’m not sure if the comparison to video rentals and public libraries helps or hurts their case. This seems like a good case for making everything public domain, but one argument you might make about libraries is that if you want the convenience of having your own copy of a book, you should pay more for that. I’m not sure how this translates to a digital world, where the digital version of a library should be just as convenient as the private alternative…
Video rental stores and libraries, of course, reduce originator profits and hurt innovation, but that is a utilitarian concern. What is of more ethical concern is that whenever, for example, someone borrows a book from the public library instead of buying a book, he has deprived the author of the fruits of his labor and participated in reducing the author’s power to control his self-expression. Thus, if it is immoral to violate a book’s copyright, so too it would seem to be immoral to use public libraries. Libraries are not illegal, but the law’s injustice would be no reason for a moral person to do unjust things. The existence of children’s sections would be particularly heinous, as encouraging children to steal.
This line of thinking, though only a few years old, sounds much more suspect today (I’m not sure the verdict on free global trade / liquidity of labor supply is as clear in 2019):
This dialectic we used to call economic progress, and, after a few centuries of intellectual debate and numerous wars, Western societies came to understand that restricting international trade was damaging because protectionism prevents economic progress and fosters international tensions leading to conflict. Since at least the late Middle Ages, the battle has been between the forces of progress, individual freedom, competition, and free trade and the forces of stagnation, regulation of individual actions, monopoly, and trade protection. Now that the intellectual and political battle over free trade of physical goods seems won, and an increasing number of less advanced countries are joining the progressive ranks of free-trading nations, pressure to make intellectual property protection stronger is mounting in those very same countries that advocate free trade. This is not coincidence.
I can’t say I recommend Intellectual Monopoly, but I can say that making it all the way through this book myself gave me a few more examples/counterexamples that will inform future thinking and writing I do about IP in an economy that is increasingly comprised of information goods and services.
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