Strategy for Information Markets/Intellectual Property
Intellectual property refers to creations of the mind. These can be in the form of inventions, literary and artistic works, symbols, names, images, and designs used in commerce. According to the Stanford Encyclopedia, "Intellectual property is generally characterized as non-physical property that is the product of original thought. Typically, rights do not surround the abstract non-physical entity; rather, intellectual property rights surround the control of physical manifestations or expressions of ideas. IP is divided into two categories: Industrial property, which includes inventions (patents), trademarks, industrial designs, and geographic indications of source; and Copyright, which includes literary and artistic works such as novels, poems and plays, films, musical works, artistic works such as drawings, paintings, photographs and sculptures, and architectural designs. Since there is often a huge difference between costs of development and costs of copying, both categories of the IP protects the rights over the creation for a set amount of time.
Patents and copyrights
There are four major ways to protect intellectual property, patents, copyrights, trademarks, and trade secrets. We will focus on patents and copyrights. The main purposes of these forms of protection are to allow owners of intellectual property to benefit from the property they have created, provide a financial incentive for the creation of an investment in intellectual property. They are used to grant exclusivity rights over the IP to its creator (or owner) as to permit the work to generate profits, enough of a profit to potentially entice, allow, and foster the production of intellectual property. If intellectual property laws were not in existence then many believe that this would greatly decrease the incentive to create new products. IP law is extremely recent considering the evolution of complex human societies, creative works have been for most part of human history released into the public domain (this is rarely done today, especially due to recent changes to the copyright law that makes it unappealing), but it continues to be possible to preserve the copyrights, even if the work is freely licensed to use, reuse and distribute.
Patents permit that anything created, whether physical or not, using a labor- and/or cost-intensive development procedure, will be guaranteed the right to exist without competition until the developer can profit from their own creation. Essentially, patents give the creator a limited monopoly, which gives the patent holder the right to exclude others from making, using, selling, or importing the patented invention for the life of the patent, which typically last 20 years. After this period, the term of protection has ended, and the patented idea or product enters the public domain. The public domain refers to works whose intellectual property rights have expired, have been forfeited, or are inapplicable. In order for something to be eligible for a patent, it must be: new (or not previously used), made or practiced in the past, and can’t have been previously described in a printed publication anywhere in the world. Applicants for patents may be denied if the suggested changes to a previously known invention or work are deemed obvious for a person who is specialized in the particular field related to the invention or work. Patents are internationally recognized and are organized by the IPC (International Patent Classification), which is a part of the World Intellectual Property Organization and was established by the Strasbourg Agreement (1971). Despite an internationally recognized organization, cases in which one party doesn’t recognize or respect a patent of another party are not uncommon.
Copyright is a form of protection provided by the laws of the United States (title 17, U.S. Code) to the authors of “original works of authorship,” which include literary, dramatic, musical, artistic, and certain other intellectual works. This protection is available to both published and unpublished works. Section 106 of the 1976 Copyright Act generally gives the owner of copyright the exclusive right to do and to authorize others to do the following: and authorization of other people to do any of the preceding. These rights include the permission to reproduce the work in copies or records, prepare derivative works based upon the work, distribute copies or records of the work to the public by sale or other transfer of ownership, or by rental, lease, or lending, perform the work publicly, in the case of literary, musical, dramatic, and choreographic works, pantomimes, and motion pictures and other audio visual works, display the work publicly, in the case of literary, musical, dramatic, and choreographic works, pantomimes, and pictorial, graphic, or sculptural works, including the individual images of a motion picture or other audiovisual work, perform the work publicly (in the case of sound recordings*) by means of a digital audio transmission. Copyrights were initially conceived as a way for government to restrict printing; however today the intent of copyrights are to promote the creation of new works by giving authors control of and profit from them. Copyrights are said to be territorial, which means that they do not extend beyond the territory of a specific state unless that state is a party to an international agreement. Today, however, this is less relevant since most countries are parties to at least one such agreement. While many aspects of national copyright laws have been standardized through international copyright agreements, copyright laws of most countries have some unique features. Typically, the duration of copyright is the whole life of the creator plus fifty to a hundred years from the creator's death, or a finite period for anonymous or corporate creations.
General model for intellectual property
Perfectly competitive markets for information goods
Since the marginal costs of information goods are typically low and constant, in a competitive market, the price is usually pushed to be almost equal to the marginal cost, then there is usually very little profit or even net lost for information goods. when the average cost curve flattens out or does not cross with marginal cost line, there is no Minimum Efficient Scale (MES) point as well. If the demanding quantities are large enough, then more than one companies might be able to survive in the market, and it is not a monopoly market any more.
As the graph showed above, the total cost of production is larger that the total revenue of selling when the price is pushed below the average cost and almost equal to the marginal cost. At the same time, the curve of average cost flattens out and does not cross with the marginal cost line. If the demand curve is long enough, there would be more than two firms producing the same product, then a natural monopoly does not exist in this case.
Intellectual property laws for information goods
By offering an exclusive right for a limited period, intellectual property laws address the problems of goods being non-rival and non-excludable in nature. This means that when an individual consumes information, it does not affect anyone else ability to consume that same information, and that people cannot be excluded from information. These intellectual property laws make the information good excludable by making people pay for the product, and makes the good rival. Intellectual property law attempts to find a balance between static and dynamic efficiency. To achieve static efficiency, surplus will be maximized by the allocation of resources, while dynamic efficiency in this case refers to the improvements to products over time. During the period of protection through either a patent or copyright the barrier of consumption (ie the copyright or patent) generates a deadweight loss for society, which disappears however once a work passes into the public domain. The problem with the good entering the public domain is that the owners of the intellectual property protections lose their royalties, which may prevent further innovation on that good. A patent or copyright gives the creator a temporary monopoly on the good, and therefore during the period of protection the price of the good will be higher, and the quantity will be lower than when the good is available in the public domain. This is the case because once the protection ends, many people will be able to create and innovate the product which will increase supply, thus reducing the price. Once the price decreases the amount demanded will increase, thus increasing quantity.
Optimum length of IP protection
Since patents there is welfare loss associated with copyrights and patents, many people have argued about how long goods can be protected under these laws, ie when will the dynamic benefits of having a patent equal the static costs of the patent/copyright holder having monopoly market power.
Optimum length of copyrights and patents
The optimum length of a copyright has been debated highly over the past few decades. Currently copyright protection for a creative work now lasts for the life of its author plus 70 years. This has been contested because many people believe that this period of time is far to long. In one of the most recent cases where the copyright term was challenged, a group of 17 economists submitted an argument stating that "it is highly unlikely that the economic benefits from copyright extension outweigh the additional costs". This makes economic sense because by the time that the copyright ends, the good is no longer going to be highly demanded by consumers. This is especially true in the case of information goods, which are replaced by better versions constantly. It clearly makes no economic sense to allow an idea to be copyrighted for a long period of time, because it doesn't allow innovation of current ideas. As economists Michele Boldrin and David K. Levine put it, "Intellectual property is in fact an intellectual monopoly that hinders rather than helps the competitive free market regime that has delivered wealth and innovation to our doorsteps.”  They also argue that license fees, regulations and copyrights patents are now so misused that they drive up the cost of creation and slow down the rate of diffusion of new ideas.
While people cannot use or disseminate the copyrighted materials of others, copyrights, or any aspects thereof, may be assigned or transferred from one party to another. An example of this is a musician who records an album will often sign an agreement with a record company, where the musician agrees to transfer all copyright in the recordings in exchange for royalties and other considerations. The creator expects to benefit from the studio's ability to produce and market their products in a far better fashion than they could on their own. In the age of digital music, music may be copied and distributed at a minimal cost through the Internet, however the record industry attempts to provide promotion and marketing for the artist and his or her work so it can reach a much larger audience. A copyright holder need not transfer all rights completely, though many publishers will insist that they do so. To grant a license, they must be granted in writing signed by the original holder of the copyright.
The argument supporting the record industry follows that most songs produced by the contracted bands were developed and produced at large cost, without property rights guaranteeing intellectual coverage, any producer would lose all incentive to create or develop something new. It’s important to understand that the objective of IP rights is not to just merely protect the IP, but instead is to protect the IP so maximum profits are achievable.
There are many things that a holder of protected IP has to consider when trying to make as much of a profit as possible. IP rights management is constantly evolving along with the growth and spread of technology throughout society. As a consequence, business models in such markets are constantly evolving as well, certain strategies work better when concerned with markets for information. For example, the electronic information market allows for extremely low reproduction and distribution costs. The holder of IP rights has the opportunity to implement techniques using this to their advantage rather than let it act as a threat. These extremely low marginal costs allow, for example, the easy spread of a new product and can help a new or “unsure” market grow. Non-information firms can similarly offer samples or free materials to boost the recognition of, and demand for, their products. Such opportunities are only possible because of the low cost to the firm. Another point of concern for holders of IP rights is that a trade-off exists between security and protection of IP and the IP value to an individual customer. That is, the less security that exists on your IP good, the more valuable it is to someone who would potentially purchase it, they can simply get more out of the product with the less security on it. A good example of this would be the competing operation software (OS) Leopard, written by Apple, and Linux. Leopard is strictly protected by IP rights so that any programs for the OS must be reviewed and approved by the IP rights holder, Apple. Linux, by contrast, maintains that anyone can write anything for the software and is encouraged to do so.
Types of patents
There are three distinct types of patents that currently exist in the United States. The first type of patents are utility patents. Utility patents are issued for the invention of a new and useful process, machine, manufacture, or composition of matter, or a new and useful improvement thereof, it generally permits its owner to exclude others from making, using, or selling the invention for a period of up to twenty years from the date of patent application.Approximately 90% of the patent documents issued by the Patent Office have been utility patents. They are also referred to as "patents for invention,". The second type of patent is a design patent. Design patents are issued for a new, original, and ornamental design for an article of manufacture. It allows its owner to exclude others from making, using,or selling the design for a period of fourteen years from the date of patent grant. The last type of patent is a plant patent. Plant patents are issued for a new and distinct, invented or discovered asexually reproduced plant including cultivated sports, mutants, hybrids, and newly found seedlings, other than a tuber propagated plant or a plant found in an uncultivated state, it permits its owner to exclude others from making, using, or selling the plant for a period of up to twenty years from the date of patent application filing.
Economic benefits of patents
Patents provide incentive for inventors to focus heavily on research and development of creating new products. When patents are in existence, inventors know that if they spend their precious time and money to develop a new idea or discovery, they will be able to prevent others from using their invention for a limited time. If there were no patents there would be a high opportunity cost associated with creating a new product, thus many experts argue that R&D spending would decrease significantly or would be eliminated altogether, limiting the amount of technological advances. Also without patent protection, inventors and corporations would be much more conservative about the R&D investments they made, due to the fact that others would be free to exploit any of their new developments, on which they spent a lot of time and money making the opportunity cost of creating new products too high. Patents are especially important to industries with high fixed costs and either low marginal costs where once an invention exists, the cost of commercializing the product is far more than the initial conception cost, and unless there is some way to prevent copies from competing at the marginal cost of production, companies will have no incentive to actually mass produce and distribute their products. In the absence of patents and other intellectual property law, the sunk cost investment in research behind an invention could only earn a quasi-rent to the extent that secrecy or intellectual property protections inhibited competitors from freely utilizing the results of the research. Once the sunk cost investment in research has been made, of course, efficiency would require that the results (i.e. the invention) be freely and widely disseminated, which would reduce the return, a quasi-rent, on the research.
Requirements for patentability
To be granted a patent in the U.S., the applicant must publicize the nature of the patented work. The patent holder gains a monopoly on the creation for a limited time, but gives up the option to treat the creation as a trade secret after the patent term expires. Furthermore, only the inventor(s) of the good are allowed to apply for a patent, however the patent can later be assigned to a corporate entity. Most patents are for incremental improvements in known technology; the innovation is evolution rather than revolution. Knowing this, Congress passed the U.S. Patent Act which set forth several requirements to apply for a patent that ensure that inventors focus on creating new useful ideas. This act set forth several criteria that all patentable ideas must have, which are: patentable subject matter, novelty, utility, non-obviousness, and enablement.
Non-obviousness If an invention is not exactly the same as prior products or processes then it is deemed to be novel. However, in order for an invention to be patentable, it must not only be novel, but it must also have non-obvious improvements over prior art. The test for non-obviousness states that the improvements to an invention must be non-obvious to a person of ordinary skill in the art.
Utility Requirement The utility requirement ensures that the utility of the patent application be credible, specific, and substantial, meaning that the idea that is being patented must have a defined real world use, otherwise the patent will be rejected.
Enablement Finally, the enablement requirement states that the application for a patent must have a written description of the invention, and of the manner and process of making and using it, in clear, concise, and exact terms as to enable any person skilled in the art to which it pertains.
Real-world application of patent law
In 2008, Michael Heller, an academic at Columbia University in New York, in an interview to technology law podcast OUT-LAW Radio ( Listen to: Are patents and copyrights making innovation impossible? OUT-LAW Radio, 28/08/2008 ) presented his theory, saying:
- "I discovered a paradox in the free market and it is this: usually private ownership creates wealth, but too much ownership has the opposite effect - it creates gridlock,". "When too many owners control a single resource – it can be a patent, a copyright, land – when too many people control a single resource, co-operation breaks down and wealth disappears. Everybody ends up losing.".
- "Imagine a drug developer walking into an auditorium and seeing 50 or 100 or several hundred patent owners, each with their essential patent on their lap, and the drug developer knows that unless he's able to negotiate successfully with every single one of those patent owners, his drug can't come to market,".
- "A standard, when it works, can solve the problem of gridlock. But to create the standard you need to get, in the context of a DVD, seven or eight hundred separate patents pooled together into a single patent pool; but there are many areas that we don't have because entrepreneurs can't get the pools together or can't get the standard negotiated.".
Heller has also published a book, The Gridlock Economy in it he expanded on his theory how too much ownership wrecks markets, stops innovation and costs lives.
Importance of patents
There are also many things that are ineligible for patents which include: laws of nature, physical phenomena, abstract ideas, as well as literary, dramatic, musical, or artistic works. This means that in information markets many ideas are un-patentable. This leads many people to believe that in information markets patents or copy rights can essentially inhibit business. One of the biggest advantages in the electronic information markets is extremely low reproduction costs and distribution costs. It is strategic then to exploit these benefits and not let copy rights or patents inhibit a firm’s ability to do so. As mentioned previously, there is a trade-off between the level of protection of IP and its value to a buyer. His view on reducing patentable ideas is important because it narrows the types of patents that can be filed, which is important because it cuts down on a lot of frivolous lawsuits that arise due to strict patent laws. This in turn increases productivity because it will decrease the amount of patents that are applied for, meaning that people's important patents will be able to reach the market faster than they would otherwise, thus giving people incentive to create useful products. The Federal Circuit Court agreed with this notion stating, ""The Federal Circuit's opinion implicitly recognizes that an out-of-control patent system was not promoting progress, but rather impeding it," said CCIA President Ed Black. "The standard articulated in this case should limit the outrageous business method and software patents that we have recently seen without undermining the incentive to innovate in these areas.".
Opposition and proposed alternatives to patents
Though many people are proponents of patents, there are some people that believe the patent system actually hurts production. An example of a group that formed that is in opposition to patents for software is the End Software Patents Group or ESP. This group is opposed to the patent system for information goods stating, "Software patents endanger both software developers and businesses, ironically stifling the very innovation that the U.S. patent system was intended to foster,". Their main contention is that companies hoard patents just to prevent others from entering a similar field. They also report that over $11.4 billion is wasted each year on software patent litigation. Their argument makes sense in economic terms, because this will limit the amount of suppliers in the market of these information goods. Also, the needless litigation that arises due to patent law cases will decrease surplus for consumers, and will cause a deadweight loss for the market.
Patent thickets coincide perfectly with the above section. Patent thickets are an overlapping set of patent rights that require people seeking patents to obtain licenses from other patent holders in order for them to create a new product. This is a considerable problem because it greatly reduces efficiency because it delays the introduction of new products. This problem is especially prevalent with regards to the patents of information goods such as computer software. Even the ways to avoid patent thickets such as getting co-licenses cause inefficiency in the market because they involve costs to the inventors of the new information goods, which causes a deadweight loss in the market.
- Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard Setting