Incentive Theory of Intellectual Property William Fisher June

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Incentive Theory of Intellectual Property William Fisher June 22, 2004 © 2004. All rights

Incentive Theory of Intellectual Property William Fisher June 22, 2004 © 2004. All rights reserved.

Intellectual Products are “Public Goods” • Can be used and enjoyed by an infinite

Intellectual Products are “Public Goods” • Can be used and enjoyed by an infinite number of persons without being “used up” • It is difficult to exclude people from access to the good Creates a danger that an inefficiently low number of such goods will be produced

Possible Responses to Public-Goods Problem (1) Government provides the good -- e. g. ,

Possible Responses to Public-Goods Problem (1) Government provides the good -- e. g. , lighthouses; armed forces (2) Government subsidizes production of the activity -- e. g. , NIH funding for basic scientific research; NEA (3) Government issues prizes -- e. g. , X-prize and associated shift in NASA policy -- e. g. , compensated expropriation of patents (4) Government confers monopoly power on producers -- e. g. , 19 th c. toll roads; intellectual-property rights (5) Government assists private parties in increasing “excludability” -- trade-secret law; “direct molding” prohibitions; anticircumvention laws

Improved Knee Brace

Improved Knee Brace

Improved Knee Brace

Improved Knee Brace

Economic Conditions Created by the Grant of a Patent $ Quantity

Economic Conditions Created by the Grant of a Patent $ Quantity

Economic Conditions Created by the Grant of a Patent $ Marginal Cost Quantity

Economic Conditions Created by the Grant of a Patent $ Marginal Cost Quantity

Economic Conditions Created by the Grant of a Patent $ Willingness and ability to

Economic Conditions Created by the Grant of a Patent $ Willingness and ability to pay of consumer X P(X) Marginal Cost X Quantity

Economic Conditions Created by the Grant of a Patent $ Willingness and ability to

Economic Conditions Created by the Grant of a Patent $ Willingness and ability to pay of consumer Y P(X) P(Y) Marginal Cost X Y Quantity

Economic Conditions Created by the Grant of a Patent $ Willingness and ability to

Economic Conditions Created by the Grant of a Patent $ Willingness and ability to pay of consumer Z P(X) P(Y) P(Z) Marginal Cost X Y Z Quantity

Economic Conditions Created by the Grant of a Patent $ Aggregate Consumer Demand P(X)

Economic Conditions Created by the Grant of a Patent $ Aggregate Consumer Demand P(X) De P(Y) ma nd P(Z) Marginal Cost X Y Z Quantity

Economic Conditions Created by the Grant of a Patent $ In the absence of

Economic Conditions Created by the Grant of a Patent $ In the absence of patent, copying and competition will drive the price down close to marginal cost P(X) De P(Y) ma nd P(Z) Marginal Cost X Y Z Quantity

Economic Conditions Created by the Grant of a Patent $ In the absence of

Economic Conditions Created by the Grant of a Patent $ In the absence of patent, copying and competition will drive the price down close to marginal cost P(X) De P(Y) ma nd P(Z) Marginal Cost X Y Z Quantity

Economic Conditions Created by the Grant of a Patent $ In the absence of

Economic Conditions Created by the Grant of a Patent $ In the absence of patent, copying and competition will drive the price down close to marginal cost P(X) De P(Y) ma nd P(Z) Marginal Cost X Y Z Quantity

Economic Conditions Created by the Grant of a Patent $ In the absence of

Economic Conditions Created by the Grant of a Patent $ In the absence of patent, copying and competition will drive the price down close to marginal cost P(X) De P(Y) ma nd P(Z) Marginal Cost X Y Z Quantity

Economic Conditions Created by the Grant of a Patent $ In the absence of

Economic Conditions Created by the Grant of a Patent $ In the absence of patent, copying and competition will drive the price down close to marginal cost P(X) De P(Y) ma nd P(Z) Marginal Cost X Y Z Quantity

Economic Conditions Created by the Grant of a Patent $ In the absence of

Economic Conditions Created by the Grant of a Patent $ In the absence of patent, copying and competition will drive the price down close to marginal cost P(X) De P(Y) ma nd P(Z) Marginal Cost X Y Z Quantity

Economic Conditions Created by the Grant of a Patent $ In the absence of

Economic Conditions Created by the Grant of a Patent $ In the absence of patent, copying and competition will drive the price down close to marginal cost P(X) De P(Y) ma nd P(Z) Marginal Cost X Y Z Quantity

Economic Conditions Created by the Grant of a Patent $ In the absence of

Economic Conditions Created by the Grant of a Patent $ In the absence of patent, copying and competition will drive the price down close to marginal cost P(X) De P(Y) ma nd P(Z) Marginal Cost X Y Z Quantity

Economic Conditions Created by the Grant of a Patent $ In the absence of

Economic Conditions Created by the Grant of a Patent $ In the absence of patent, copying and competition will drive the price down close to marginal cost P(X) De P(Y) ma nd P(Z) Marginal Cost X Y Z Quantity

Economic Conditions Created by the Grant of a Patent $ In the absence of

Economic Conditions Created by the Grant of a Patent $ In the absence of patent, copying and competition will drive the price down close to marginal cost P(X) De P(Y) ma nd P(Z) Marginal Cost X Y Z Q Quantity

Economic Conditions Created by the Grant of a Patent $ In the absence of

Economic Conditions Created by the Grant of a Patent $ In the absence of patent, copying and competition will drive the price down close to marginal cost Resultant Consumer Surplus P(X) De P(Y) ma nd P(Z) Marginal Cost X Y Z Q Quantity

Economic Conditions Created by the Grant of a Patent $ In the absence of

Economic Conditions Created by the Grant of a Patent $ In the absence of patent, copying and competition will drive the price down close to marginal cost P(X) De P(Y) ma nd P(Z) Marginal Cost X Y Z Q Quantity

Economic Conditions Created by the Grant of a Patent $ P(X) De P(Y) ma

Economic Conditions Created by the Grant of a Patent $ P(X) De P(Y) ma nd P(Z) Marginal Cost X Y Z Quantity

Economic Conditions Created by the Grant of a Patent $ Profit-Maximizing Behavior by a

Economic Conditions Created by the Grant of a Patent $ Profit-Maximizing Behavior by a Patentee who can engage in perfect price discrimination P(X) De P(Y) ma nd P(Z) Marginal Cost X Y Z Quantity

Economic Conditions Created by the Grant of a Patent $ Profit-Maximizing Behavior by a

Economic Conditions Created by the Grant of a Patent $ Profit-Maximizing Behavior by a Patentee who can engage in perfect price discrimination P(X) De P(Y) ma nd P(Z) Marginal Cost X Y Z Quantity

Economic Conditions Created by the Grant of a Patent $ Profit-Maximizing Behavior by a

Economic Conditions Created by the Grant of a Patent $ Profit-Maximizing Behavior by a Patentee who can engage in perfect price discrimination “Monopoly Profits” P(X) De P(Y) ma P(Z) nd Marginal Cost X Y Z Profit-maximizing output Quantity

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price Discrimination De ma nd C O G Marginal Cost H I Quantity

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price Discrimination p De ma nd C O G Marginal Cost H I Quantity

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price Discrimination p De ma nd C O u G Marginal Cost H I Quantity

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price Discrimination Revenues p De ma nd C O u G Marginal Cost H I Quantity

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price Discrimination Costs p De ma nd C O u G Marginal Cost H I Quantity

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price Discrimination Profits p De ma nd C O u G Marginal Cost H I Quantity

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price Discrimination p De ma nd C O u G Marginal Cost H I Quantity

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price Discrimination p q De ma nd C O u G Marginal Cost H I Quantity

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price Discrimination p q De ma nd C O uv G Marginal Cost H I Quantity

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price Discrimination Revenue loss p q De ma nd C O uv G Marginal Cost H I Quantity

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price Discrimination Revenue loss Revenue gain p q De ma nd C O uv G Marginal Cost H I Quantity

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price Discrimination Profits p q De ma nd C O uv G Marginal Cost H I Quantity

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price Discrimination p q De ma nd r C O uv G Marginal Cost H I Quantity

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price Discrimination p q De ma nd r C O uv w G Marginal Cost H I Quantity

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price Discrimination Revenue loss p q De ma nd r C O uv w G Marginal Cost H I Quantity

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price Discrimination Revenue loss p q De ma nd r C O uv w Revenue gain G Marginal Cost H I Quantity

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price Discrimination p q Profit De ma nd r C O uv w G Marginal Cost H I Quantity

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price Discrimination De ma nd C O G Marginal Cost H I Quantity

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price Discrimination Marginal Revenue De ma nd C O G Marginal Cost H I Quantity

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price

$ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price Discrimination D B C O Marginal Revenue De ma nd G Marginal Cost H I E F Quantity

Profit-maximizing price $ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence

Profit-maximizing price $ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price Discrimination D B C O Marginal Revenue De ma nd G Marginal Cost H I E F Profit-maximizing output Quantity

Profit-maximizing price $ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence

Profit-maximizing price $ A Figure 1: Profit-Maximizing Behavior by a Patentee In the absence of Price Discrimination Monopoly Profits D B De ma nd 1 C O Marginal Revenue G Marginal Cost H I E F Profit-maximizing output Quantity

Figure 2: Economic Effects of Profit-Maximizing Behavior by a Patentee Profit-maximizing price $ A

Figure 2: Economic Effects of Profit-Maximizing Behavior by a Patentee Profit-maximizing price $ A Consumer Surplus Monopoly Profits 2 D B 1 C O De ma nd E F G Marginal Cost H I Profit-maximizing output Quantity

Figure 2: Economic Effects of Profit-Maximizing Behavior by a Patentee Profit-maximizing price $ A

Figure 2: Economic Effects of Profit-Maximizing Behavior by a Patentee Profit-maximizing price $ A Consumer Surplus Monopoly Profits 2 D B De ma nd 1 C O E 3 Deadweight Loss (foregone consumer surplus) G Marginal Cost H I E F Profit-maximizing output Quantity

Applications of Reward Theory • Assessing the merits and demerits of partial price discrimination

Applications of Reward Theory • Assessing the merits and demerits of partial price discrimination • Assessing the merits and demerits of compulsory licenses • Determining the Optimal Pattern of Entitlements (possible in theory, not in practice) • Posner’s “positive” account of extant doctrine

Applications of Reward Theory • Assessing the merits and demerits of partial price discrimination

Applications of Reward Theory • Assessing the merits and demerits of partial price discrimination • Assessing the merits and demerits of compulsory licenses • Determining the Optimal Pattern of Entitlements (possible in theory, not in practice) • Posner’s “positive” account of extant doctrine

Partial Price Discrimination $ Marginal Cost O Quantity

Partial Price Discrimination $ Marginal Cost O Quantity

Partial Price Discrimination $ Marginal Cost O u v w x Discrete markets y

Partial Price Discrimination $ Marginal Cost O u v w x Discrete markets y Quantity

Partial Price Discrimination $ p Monopoly Profits Marginal Cost O u v w x

Partial Price Discrimination $ p Monopoly Profits Marginal Cost O u v w x y Quantity

Partial Price Discrimination $ p q Monopoly Profits Marginal Cost O u v w

Partial Price Discrimination $ p q Monopoly Profits Marginal Cost O u v w x y Quantity

Partial Price Discrimination $ p q r Monopoly Profits Marginal Cost O u v

Partial Price Discrimination $ p q r Monopoly Profits Marginal Cost O u v w x y Quantity

Partial Price Discrimination $ p q r s Monopoly Profits Marginal Cost O u

Partial Price Discrimination $ p q r s Monopoly Profits Marginal Cost O u v w x y Quantity

Partial Price Discrimination $ p q r s Monopoly Profits t Marginal Cost O

Partial Price Discrimination $ p q r s Monopoly Profits t Marginal Cost O u v w x y Quantity

Illustrations of Price Discrimination Techniques • “Second Degree”: Offer 2 models: – Regular for

Illustrations of Price Discrimination Techniques • “Second Degree”: Offer 2 models: – Regular for $250 – Premium (carbon-fiber) for $500 • “Third Degree”: Price varies by zip code of purchaser’s residence

Figure 2. 4: Market Windows from Release Date Domestic Theatrical Foreign Theatrical Pay per

Figure 2. 4: Market Windows from Release Date Domestic Theatrical Foreign Theatrical Pay per view Home Video Pay TV Foreign TV Network TV Syndication 0 1 2 3 4 Time in Years 5 6 7

Example of Partial Price Discrimination Licensing first-runs in movie theatres $ Licensing for pay-per-view

Example of Partial Price Discrimination Licensing first-runs in movie theatres $ Licensing for pay-per-view Licensing for home video rental Licensing for network broadcast Licensing for local broadcas D 1 2 3 Marginal Cost 4 5 G Quantity

Figure 3: Economic Impact of Partial Price Discrimination $ p q r s t

Figure 3: Economic Impact of Partial Price Discrimination $ p q r s t Consumer Surplus 2 Monopoly Profits 1 D O u v w Marginal Cost x y Quantity

Figure 3: Economic Impact of Partial Price Discrimination $ p q r s t

Figure 3: Economic Impact of Partial Price Discrimination $ p q r s t Consumer Surplus 2 Monopoly Profits 1 3 D O u v w x Marginal Cost Quantity y Deadweight Loss

Figure 3: Economic Impact of Partial Price Discrimination $ Consumer Surplus 2 Monopoly Profits

Figure 3: Economic Impact of Partial Price Discrimination $ Consumer Surplus 2 Monopoly Profits 1 D O 3 Marginal Cost Quantity Deadweight Loss

Figure 2: No Price Discrimination $ Consumer Surplus 2 Monopoly Profits 1 E 3

Figure 2: No Price Discrimination $ Consumer Surplus 2 Monopoly Profits 1 E 3 Marginal Cost E O Quantity Deadweight Loss

Effects of Partial Price Discrimination on Consumer Surplus No price discrimination Partial Price Discrimination

Effects of Partial Price Discrimination on Consumer Surplus No price discrimination Partial Price Discrimination Relative Size of the Surpluses depends on how finely the copyright owner can slice up the market

Effects of Partial Price Discrimination Ø Enables Creators to Make More Money Ø Reduces

Effects of Partial Price Discrimination Ø Enables Creators to Make More Money Ø Reduces deadweight loss Ø Indeterminate impact on consumer surplus Ø Increases ratio between incentive for creativity and deadweight loss -- thus enhances net consumer welfare Ø Increases the likelihood that all persons will have access to works of the intellect Ø Increases Transaction Costs Ø Distortions caused by 2 nd degree PD alternatives Ø Possible invasions of privacy Ø Possible threat to cumulative innovation

Applications of Reward Theory • Assessing the merits and demerits of partial price discrimination

Applications of Reward Theory • Assessing the merits and demerits of partial price discrimination • Assessing the merits and demerits of compulsory licenses • Determining the Optimal Pattern of Entitlements (possible in theory, not in practice) • Posner’s “positive” account of extant doctrine

Applications of Reward Theory • Assessing the merits and demerits of partial price discrimination

Applications of Reward Theory • Assessing the merits and demerits of partial price discrimination • Assessing the merits and demerits of compulsory licenses • Determining the Optimal Pattern of Entitlements (possible in theory, not in practice) • Posner’s “positive” account of extant doctrine

Figure 2: Economic Effects of Profit-Maximizing Behavior by a Patentee $ Consumer Surplus Profit-maximizing

Figure 2: Economic Effects of Profit-Maximizing Behavior by a Patentee $ Consumer Surplus Profit-maximizing price Monopoly Profits De ma nd E Deadweight Loss (foregone consumer surplus) Marginal Cost Quantity Profit-maximizing output

Figure 2: Economic Effects of Profit-Maximizing Behavior by a Patentee $ Profit-maximizing price Monopoly

Figure 2: Economic Effects of Profit-Maximizing Behavior by a Patentee $ Profit-maximizing price Monopoly Profits De ma nd E Deadweight Loss (foregone consumer surplus) Marginal Cost Quantity Profit-maximizing output

Figure 2: Economic Effects of Profit-Maximizing Behavior by a Patentee $ Profit-maximizing price Monopoly

Figure 2: Economic Effects of Profit-Maximizing Behavior by a Patentee $ Profit-maximizing price Monopoly Profits De ma nd Marginal Cost Quantity Profit-maximizing output

Figure 2: Economic Effects of Profit-Maximizing Behavior by a Patentee $ Profit-maximizing price Monopoly

Figure 2: Economic Effects of Profit-Maximizing Behavior by a Patentee $ Profit-maximizing price Monopoly Profits Force Patentee to License the work for reduced fee De ma nd Marginal Cost Quantity Profit-maximizing output

Figure 2: Economic Effects of Profit-Maximizing Behavior by a Patentee $ Monopoly Profits Force

Figure 2: Economic Effects of Profit-Maximizing Behavior by a Patentee $ Monopoly Profits Force Patentee to License the work for reduced fee De ma nd Marginal Cost Quantity Profit-maximizing output

Figure 2: Economic Effects of Profit-Maximizing Behavior by a Patentee $ Force Patentee to

Figure 2: Economic Effects of Profit-Maximizing Behavior by a Patentee $ Force Patentee to License the work for reduced fee De ma nd E Marginal Cost Quantity Profit-maximizing output

Economic Impact of a Compulsory Licensing System $ License Fee Monopoly Profits De ma

Economic Impact of a Compulsory Licensing System $ License Fee Monopoly Profits De ma nd D Marginal Cost Quantity

Economic Impact of a Compulsory Licensing System $ Monopoly Profits License Fee Deadweight Loss

Economic Impact of a Compulsory Licensing System $ Monopoly Profits License Fee Deadweight Loss De ma nd D Marginal Cost Quantity

Economic Impact of a Compulsory Licensing System $ Consumer Surplus Monopoly Profits License Fee

Economic Impact of a Compulsory Licensing System $ Consumer Surplus Monopoly Profits License Fee Deadweight Loss De ma nd D Marginal Cost Quantity

Effects of Compulsory Licensing on Consumer Surplus No price regulation Compulsory license Advantages of

Effects of Compulsory Licensing on Consumer Surplus No price regulation Compulsory license Advantages of the Compulsory license will be offset, at least partially, by administrative costs

Effects of Compulsory Licensing on Incentive to Loss Ratio • Reduce monopoly profits moderately

Effects of Compulsory Licensing on Incentive to Loss Ratio • Reduce monopoly profits moderately • Reduce deadweight loss substantially • Increase administrative costs May increase the overall ratio

Applications of Reward Theory • Assessing the merits and demerits of partial price discrimination

Applications of Reward Theory • Assessing the merits and demerits of partial price discrimination • Assessing the merits and demerits of compulsory licenses • Determining the Optimal Pattern of Entitlements (possible in theory, not in practice) • Posner’s “positive” account of extant doctrine

Applications of Reward Theory • Assessing the merits and demerits of partial price discrimination

Applications of Reward Theory • Assessing the merits and demerits of partial price discrimination • Assessing the merits and demerits of compulsory licenses • Determining the Optimal Pattern of Entitlements (possible in theory, not in practice) • Posner’s “positive” account of extant doctrine

Determining Optimal Levels of Patent Protection

Determining Optimal Levels of Patent Protection

Determining Optimal Levels of Patent Protection (1) Ascertain the incentive/loss ratio for each of

Determining Optimal Levels of Patent Protection (1) Ascertain the incentive/loss ratio for each of the set of possible entitlements

Determining Optimal Levels of Patent Protection (1) Ascertain the incentive/loss ratio for each of

Determining Optimal Levels of Patent Protection (1) Ascertain the incentive/loss ratio for each of the set of possible entitlements B 58/25=2. 32

Determining Optimal Levels of Patent Protection (1) Ascertain the incentive/loss ratio for each of

Determining Optimal Levels of Patent Protection (1) Ascertain the incentive/loss ratio for each of the set of possible entitlements B C 58/25=2. 32 17/8=2. 13

Determining Optimal Levels of Patent Protection (1) Ascertain the incentive/loss ratio for each of

Determining Optimal Levels of Patent Protection (1) Ascertain the incentive/loss ratio for each of the set of possible entitlements E B C 58/25=2. 32 17/8=2. 13 75/108=0. 69

Determining Optimal Levels of Patent Protection (1) Ascertain the incentive/loss ratio for each of

Determining Optimal Levels of Patent Protection (1) Ascertain the incentive/loss ratio for each of the set of possible entitlements E D 75/108=0. 69 100/92=1. 09 B C 58/25=2. 32 17/8=2. 13

Determining Optimal Levels of Patent Protection (1) Ascertain the incentive/loss ratio for each of

Determining Optimal Levels of Patent Protection (1) Ascertain the incentive/loss ratio for each of the set of possible entitlements E D A B C 58/25=2. 32 17/8=2. 13 75/108=0. 69 100/92=1. 09 75/17=4. 41

Determining Optimal Levels of Patent Protection (1) Ascertain the incentive/loss ratio for each of

Determining Optimal Levels of Patent Protection (1) Ascertain the incentive/loss ratio for each of the set of possible entitlements (2) Arrange them from highest ratio to lowest E D A B C 58/25=2. 32 17/8=2. 13 75/108=0. 69 100/92=1. 09 75/17=4. 41

Determining Optimal Levels of Patent Protection (1) Ascertain the incentive/loss ratio for each of

Determining Optimal Levels of Patent Protection (1) Ascertain the incentive/loss ratio for each of the set of possible entitlements (2) Arrange them from highest ratio to lowest A D E 100/92=1. 09 75/108=0. 69 B C 75/17=4. 41 58/25=2. 32 17/8=2. 13

Determining Optimal Levels of Patent Protection (1) Ascertain the incentive/loss ratio for each of

Determining Optimal Levels of Patent Protection (1) Ascertain the incentive/loss ratio for each of the set of possible entitlements (2) Arrange them from highest ratio to lowest (3) Plot the sequence on a graph so that the line corresponding to aggregate reward is linear A D E 100/92=1. 0 9 75/108=0. 6 9 B C 75/17=4. 41 58/25=2. 32 17/8=2. 13

Determining Optimal Levels of Patent Protection (no patent protection)

Determining Optimal Levels of Patent Protection (no patent protection)

Determining Optimal Levels of Patent Protection Reward to Producers In the absence of any

Determining Optimal Levels of Patent Protection Reward to Producers In the absence of any patent protection (no patent protection)

Determining Optimal Levels of Patent Protection Aggregate Reward to Producers caused by forbidding each

Determining Optimal Levels of Patent Protection Aggregate Reward to Producers caused by forbidding each successive use (no patent protection) Reward to Producers In the absence of any patent protection

Determining Optimal Levels of Patent Protection 75 (no patent protection) Aggregate Reward to Producers

Determining Optimal Levels of Patent Protection 75 (no patent protection) Aggregate Reward to Producers caused by forbidding each successive use A Reward to Producers In the absence of any v protection

Determining Optimal Levels of Patent Protection 58 75 (no patent protection) Aggregate Reward to

Determining Optimal Levels of Patent Protection 58 75 (no patent protection) Aggregate Reward to Producers caused by forbidding each successive use A B Reward to Producers In the absence of any patent protection

Determining Optimal Levels of Patent Protection 17 58 75 (no patent protection) Aggregate Reward

Determining Optimal Levels of Patent Protection 17 58 75 (no patent protection) Aggregate Reward to Producers caused by forbidding each successive use A B C Reward to Producers In the absence of any patent protection

Determining Optimal Levels of v Protection 100 17 58 75 (no patent protection) Aggregate

Determining Optimal Levels of v Protection 100 17 58 75 (no patent protection) Aggregate Reward to Producers caused by forbidding each successive use A B C Reward to Producers In the absence of any patent protection D

Determining Optimal Levels of Patent Protection 75 100 17 58 75 (no patent protection)

Determining Optimal Levels of Patent Protection 75 100 17 58 75 (no patent protection) Aggregate Reward to Producers caused by forbidding each successive use A B C Reward to Producers In the absence of any patent protection D E

Determining Optimal Levels of Patent Protection Aggregate Reward to Producers caused by forbidding each

Determining Optimal Levels of Patent Protection Aggregate Reward to Producers caused by forbidding each successive use (no patent protection) A B C D E

Determining Optimal Levels of Patent Protection (1) Ascertain the incentive/loss ratio for each of

Determining Optimal Levels of Patent Protection (1) Ascertain the incentive/loss ratio for each of the set of possible entitlements (2) Arrange them from highest ratio to lowest (3) Plot the sequence on a graph so that the line corresponding to aggregate reward is linear

Determining Optimal Levels of Patent Protection (1) Ascertain the incentive/loss ratio for each of

Determining Optimal Levels of Patent Protection (1) Ascertain the incentive/loss ratio for each of the set of possible entitlements (2) Arrange them from highest ratio to lowest (3) Plot the sequence on a graph so that the line corresponding to aggregate reward is linear (4) Plot the corresponding levels of aggregate social loss

Determining Optimal Levels of Patent Protection Aggregate Reward to Producers caused by forbidding each

Determining Optimal Levels of Patent Protection Aggregate Reward to Producers caused by forbidding each successive use (no patent protection) A B C D E

Determining Optimal Levels of Patent Protection (no patent protection) A B C D E

Determining Optimal Levels of Patent Protection (no patent protection) A B C D E

Determining Optimal Levels of Patent Protection Aggregate Efficiency Loss caused by forbidding each successive

Determining Optimal Levels of Patent Protection Aggregate Efficiency Loss caused by forbidding each successive use (no patent protection) A B C D E

Determining Optimal Levels of Patent Protection Aggregate Efficiency Loss caused by forbidding each successive

Determining Optimal Levels of Patent Protection Aggregate Efficiency Loss caused by forbidding each successive use (no patent protection) A B C D E

Determining Optimal Levels of Patent Protection Aggregate Efficiency Loss caused by forbidding each successive

Determining Optimal Levels of Patent Protection Aggregate Efficiency Loss caused by forbidding each successive use (no patent protection) A B C D E

Determining Optimal Levels of Patent Protection Aggregate Efficiency Loss caused by forbidding each successive

Determining Optimal Levels of Patent Protection Aggregate Efficiency Loss caused by forbidding each successive use (no patent protection) A B C D E

Determining Optimal Levels of Patent Protection Aggregate Efficiency Loss caused by forbidding each successive

Determining Optimal Levels of Patent Protection Aggregate Efficiency Loss caused by forbidding each successive use (no patent protection) A B C D E

Determining Optimal Levels of Patent Protection Aggregate Reward to Producers caused by forbidding each

Determining Optimal Levels of Patent Protection Aggregate Reward to Producers caused by forbidding each successive use (no patent protection) A B C Aggregate Efficiency Loss caused by forbidding each successive use D E

Determining Optimal Levels of Patent Protection (1) Ascertain the incentive/loss ratio for each of

Determining Optimal Levels of Patent Protection (1) Ascertain the incentive/loss ratio for each of the set of possible entitlements (2) Arrange them from highest ratio to lowest (3) Plot the sequence on a graph so that the line corresponding to aggregate reward is linear (4) Plot the corresponding levels of aggregate social loss

Determining Optimal Levels of Patent Protection (1) Ascertain the incentive/loss ratio for each of

Determining Optimal Levels of Patent Protection (1) Ascertain the incentive/loss ratio for each of the set of possible entitlements (2) Arrange them from highest ratio to lowest (3) Plot the sequence on a graph so that the line corresponding to aggregate reward is linear (4) Plot the corresponding levels of aggregate social loss (5) Plot the efficiency gains associated with each increase in aggregate reward

Determining Optimal Levels of Patent Protection Aggregate Reward to Producers caused by forbidding each

Determining Optimal Levels of Patent Protection Aggregate Reward to Producers caused by forbidding each successive use (no patent protection) A B C Aggregate Efficiency Loss caused by forbidding each successive use D E

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by each level of reward Aggregate Reward to Producers caused by forbidding each successive use (no patent protection) A B C Aggregate Efficiency Loss caused by forbidding each successive use D E

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by each level of reward Aggregate Reward to Producers caused by forbidding each successive use (no patent protection) A B C Aggregate Efficiency Loss caused by forbidding each successive use D E

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by each level of reward Aggregate Reward to Producers caused by forbidding each successive use (no patent protection) A B C Aggregate Efficiency Loss caused by forbidding each successive use D E

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by each level of reward Aggregate Reward to Producers caused by forbidding each successive use (no patent protection) A B C Aggregate Efficiency Loss caused by forbidding each successive use D E

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by each level of reward Aggregate Reward to Producers caused by forbidding each successive use (no patent protection) A B C Aggregate Efficiency Loss caused by forbidding each successive use D E

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by each level of reward Aggregate Reward to Producers caused by forbidding each successive use (no patent protection) A B C Aggregate Efficiency Loss caused by forbidding each successive use D E

Determining Optimal Levels of Patent Protection (1) Ascertain the incentive/loss ratio for each of

Determining Optimal Levels of Patent Protection (1) Ascertain the incentive/loss ratio for each of the set of possible entitlements (2) Arrange them from highest ratio to lowest (3) Plot the sequence on a graph so that the line corresponding to aggregate reward is linear (4) Plot the corresponding levels of aggregate social loss (5) Plot the efficiency gains associated with each increase in aggregate reward

Determining Optimal Levels of Patent Protection (1) Ascertain the incentive/loss ratio for each of

Determining Optimal Levels of Patent Protection (1) Ascertain the incentive/loss ratio for each of the set of possible entitlements (2) Arrange them from highest ratio to lowest (3) Plot the sequence on a graph so that the line corresponding to aggregate reward is linear (4) Plot the corresponding levels of aggregate social loss (5) Plot the efficiency gains associated with each increase in aggregate reward (6) Plot difference between top and bottom lines

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by each level of reward Aggregate Reward to Producers caused by forbidding each successive use (no patent protection) A B C Aggregate Efficiency Loss caused by forbidding each successive use D E

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by each level of reward Aggregate Reward to Producers caused by forbidding each successive use (no patent protection) A B C Aggregate Efficiency Loss caused by forbidding each successive use D E

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by each level of reward Aggregate Reward to Producers caused by forbidding each successive use (no patent protection) A B C Aggregate Efficiency Loss caused by forbidding each successive use D E

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by each level of reward Aggregate Reward to Producers caused by forbidding each successive use (no patent protection) A B C Aggregate Efficiency Loss caused by forbidding each successive use D E

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by each level of reward Aggregate Reward to Producers caused by forbidding each successive use (no patent protection) A B C Aggregate Efficiency Loss caused by forbidding each successive use D E

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by each level of reward Aggregate Reward to Producers caused by forbidding each successive use (no patent protection) A B C Aggregate Efficiency Loss caused by forbidding each successive use D E

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by each level of reward Net impact on economic efficiency of forbidding each successive use Aggregate Reward to Producers caused by forbidding each successive use (no patent protection) A B C Aggregate Efficiency Loss caused by forbidding each successive use D E

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by each level of reward Identify Highest Point Net impact on economic efficiency of forbidding each successive use Aggregate Reward to Producers caused by forbidding each successive use (no patent protection) A B C Aggregate Efficiency Loss caused by forbidding each successive use D E

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by each level of reward Assign these entitlements To patentees Net impact on economic efficiency of forbidding each successive use Aggregate Reward to Producers caused by forbidding each successive use (no patent protection) A B C Aggregate Efficiency Loss caused by forbidding each successive use D E

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by

Determining Optimal Levels of Patent Protection Efficiency Gains caused by increased productivity induced by each level of reward Deny these entitlements To patentees Assign these entitlements To patentees Net impact on economic efficiency of forbidding each successive use Aggregate Reward to Producers caused by forbidding each successive use (no patent protection) A B C Aggregate Efficiency Loss caused by forbidding each successive use D E

Determining Optimal Levels of Patent Protection Very rough guidelines: Grant to patentees entitlements that

Determining Optimal Levels of Patent Protection Very rough guidelines: Grant to patentees entitlements that carry with them large ratios – and refuse to excuse encroachments upon those entitlements Deny to patentees entitlements that carry with them small ratios – or grant the entitlements but excuse encroachments upon those entitlements

Applications of Reward Theory • Assessing the merits and demerits of partial price discrimination

Applications of Reward Theory • Assessing the merits and demerits of partial price discrimination • Assessing the merits and demerits of compulsory licenses • Determining the Optimal Pattern of Entitlements (possible in theory, not in practice) • Posner’s “positive” account of extant doctrine