Property Law Intellectual property patents copyrights and trademarks

Property Law Intellectual property: patents, copyrights and trademarks 10/06/09 Prop_D 1

An important example of a public good: property rights and information Economics of Information: Information is a commodity – property which we buy, sell or give away (weather reports, news, gossip columns, movies, recordings, books, inventions, scientific discoveries, my lecture notes) What is the ‘value’ of a given piece of information? The sum of what all users would be willing to pay for it if they had to buy it from the creator/producer – same as in the car market or any other market Will private markets produce the efficient amount of information? Yes, if they worked like car markets, but do they? 10/06/09 Prop_D 2

Problem: Information is - costly to produce - inexpensive to transmit (weather reports, news, gossip columns, movies, recordings, books, inventions, discoveries, these lecture notes) Once produced and initially sold it is inexpensive for the original buyers, or borrowers, to reproduce the information for resale, or to give away As a result the original creators/producers cannot recoup the full value of what they produce 10/06/09 Prop_D 3

This is a variation on the non-rivalry/non-excludability problem – nonappropriability Secondary users will ‘free ride’, paying only the cost of transmitting and none of the costs of producing Result: Less than the optimal amount of information will be produced – a market failure Possible government interventions: - government supply, taxes and subsidies (i. e. arts and science, tax on blank CD’s or DVD’s) - trade secrets protection (will not look at this) - intellectual property law 10/06/09 Prop_D 4

An important aside: How does advertising help to overcome this problem? What if the newspaper you borrow carries advertising sold at prices dependent on readership not volume of sales? What about movie producers who get paid to have their actors drink Pepsi or smoke Marlboroughs? What about those annoying ads on the videos which you rent or copy illegally? What about all this ‘free’ information which you get on the Internet? Is there often an advertisement nearby? Maybe I should sell advertising space in my class notes? These lecture notes are brought to you by STAY AWAKE – guaranteed to keep you awake even while listening to this lecture! Available at your local pharmacy. 10/06/09 Prop_D 5

Intellectual property: patents, copyrights and trademarks If creators/producers could appropriate the social value of the information that they produce, then the efficient amount of information would be created Inexpensive re-transmission of information implies that markets alone will not allow them to do this – markets fail Granting exclusive property rights to the creator of information allows the creator to appropriate more of its social value The longer the duration and the broader the scope of the grant of exclusivity, the greater will be the value appropriated by the creator and the stronger will be the incentive to create ideas/information. 10/06/09 Prop_D 6

Sounds simple – just grant exclusivity – a special law which creates legally enforced ‘excludability’ for a specific property Problem: the longer the duration and the broader the scope of the grant of exclusivity, the weaker will be the incentive to disseminate and apply the ideas Exclusivity implies monopoly and we know that monopolist will supply too little of whatever the monopolist has the sole right to produce – another market failure Inherent trade-off between providing incentives to create ideas at the cost of simultaneously providing incentives which restrict the socially useful spread of those ideas – this is the essence of ‘intellectual property law’ 10/06/09 Prop_D 7

Three principle areas of intellectual property law: Patents - the granting of temporary property rights to inventions and discoveries Copyright - the granting of temporary property rights to authors, artists, composers, etc. Trademark - the granting of permanent property rights to commercially used symbols Intellectual property law sets different ‘duration and scope’ for property rights in each of these areas - the differences generally reflect efficiency considerations 10/06/09 Prop_D 8

Breadth and Duration of Patents “I didn’t build it but it’s based on an idea of mine” 10/06/09 Prop_D 9

Patents Venice of 1474 - English Statute of Monopolies of 1623 Some patent facts 75% of the value of publicly traded companies comes from intangible assets Technology licensing revenue worldwide is about $100 billion annually IBM earns $1 billion a year from its intellectual property portfolio - HP earns $200 million In U. S. cost of patent application $2, 000 - legal fees $35, 000 U. S. Europe and Japan account for 90% of world patents IBM has 40, 000 patents – 3, 000 new patents annually Intel holds 10, 000 patents 10/06/09 Prop_D 10

Breadth of Patent - scope Two phases of the eventual commercial introduction of a new idea: - fundamental, or basic, research (basic science/engineering) - development of the basic concept into marketable applications (laser, transistor, silicon chip) QUESTION #1 Should a ‘broad’ grant of patent be made – over all eventual applications of the basic idea? Should a ‘narrow’ grant of patent be made – over only a specific use of the basic idea? 10/06/09 Prop_D 11

Broad patent - exclusive use of the basic principle and its commercial applications - encourages more investment in basic research but less investment in developing commercial applications Narrow patent – exclusive use of more specific applications of the basic principle - encourages less investment in basic research but more investment in the commercial development of basic research results 10/06/09 Prop_D 12

What breadth of patent is appropriate? social value of basic research > social value of commercial development, then a broad patent should be granted social value of commercial development > social value of basic research, then a narrow patent should be granted This principle is likely to be difficult to apply in practice But remember what we are really interested in is ‘commercial development’ - maybe the above refers to ‘known’ commercial developments 10/06/09 Prop_D 13

A variation on the Coase theorem: If transaction costs are zero, then what type of patent is granted does not matter. Either the holder of a broad basic research patent will bring the idea to market (develop the commercial applications herself) or will licence the commercial development of her patent to someone better suited to do so. BUT if transaction costs are not zero, and they generally are not, then we know that efficient private bargaining outcomes might not result. The Coase theorem will not hold. What about aberrant corporate behaviour – a firm using a patent in one area to extend its monopoly power into another market (Microsoft and bundling)? 10/06/09 Prop_D 14

Duration - patent life The granting of patent rights implies the granting of monopoly power over the commercial use of the property A patent holder can set price at the monopoly level above the socially optimal level, resulting in too little of the product being produced But recall, this is the whole idea of patents – grant monopoly profits to inventors/discoverers so that they will incur the costs of inventing/discovering 10/06/09 Prop_D 15

This social cost of the artificially low monopoly output increases as the length of the patent increases - output is restricted over a longer period QUESTION #2 What is the ‘efficient’ duration of patent (patent life)? That length of time required to generate sufficient monopoly profits which provide the incentive for the inventor/discoverer to incur the costs (including risk of failure) of basic research and commercial development of a new idea Again, this is likely to be different for each new idea, impossible to know in advance and very difficult to apply in practice In Canada – generally 20 years. 10/06/09 Prop_D 16

How serious is the ‘duration’ problem as opposed to the ‘breadth’ problem? Consider the following: - If a narrow grant of patent is made and if the general idea has commercial promise then other inventors/discoverers will enter and compete in this market for ideas – the duration of any given patent will not matter - If a broad grant of patent is made then other inventors/discoverers will be precluded from entering and competing in this market for ideas – the duration of any given patent will be very important Examples: high tech computer, communications, entertainment products, pharmaceuticals – competing ideas often show up in the market place long before a given patent life expires 10/06/09 Prop_D 17

Copyright grants writers, composers, movie makers, performers, other artist and creators property rights over their ‘original expressions’ Same issues: breadth and duration Breadth of copyright defines how copyrighted material can be used without authorization - a broad copyright would ban any unauthorized use of the material (i. e. without the expressed written consent of the Commissioner of Baseball!) - a narrow copyright would permit some unauthorized uses. (Can a library lend it out? Can a buyer or borrower photocopy it? Can a viewer or listener make recordings of it? ) 10/06/09 Prop_D 18

- if you own a piece of fine art (a Picasso or a Warhol) then pictures of that piece of art cannot be reproduced in monographs without your permission - radio stations must pay a fee to writers and performers for each play of their recording The definition of authorized and unauthorized use is sometimes a difficult issue in practice. Again: appropriate amount of financial incentive to creators versus limiting the dissemination (enjoyment) of what they create The more commercial control that creators have over their output, the greater the financial reward they will scoop but the more financial reward they are able to scoop the less exposed will be their creations - the smaller will be the social benefit. 10/06/09 Prop_D 19

Duration of copyright is generally set as the creator’s life plus 50 years After the copyright period, the work enters the public domain and anyone can make use of it (the Bible, Shakespeare's work, Alice in Wonderland, Winney the Pooh) WHAT ABOUT MUSIC DOESN’T MACARTNEY OWN THE RIGHT TO COLLEGE ANTHEMS? What about the reproduction of fine art? Duration must be different in these cases. Tracing: it is sometimes difficult to determine who owns the rights to a given creation – high transaction cost Setting a finite duration for copyright means that older creations, the ownership of which might be difficult to trace, is unnecessary – but ‘tracking technology’ is such that this is no longer an issue 10/06/09 Prop_D 20

Trademark (including brand names? ) Trademark is a symbol identifying the commercial producer of a good, service or a non-profit organization These symbols do not in themselves have utility (we do not consume the name Coca-Cola) - they identify the producer of a good and thereby help the consumer evaluate quality (important social value – information) Breadth: How to establish property rights over a trademark or brand name - establish that it is sufficiently different from any other trademark or brand name currently in use 10/06/09 Prop_D 21

Property rights over trademarks and brand names must continually defended (enforced) Danger what if a brand name becomes part of the ‘language’ – no one has property rights over language (common nouns or verbs) Xeroxing for photocopying Scotch Tape for cellophane tape Aspirin for acetyl salicylic acid Seadooing for water sports Coke for any cola drink Once this happens the property rights are lost Waiter: Customer: 10/06/09 “Would like something to drink with that? ” “Yeah, I’ll have a Coke. ” “Would a Pepsi be ok? We serve Pepsi. ” “Yeah, yeah, whatever!” Prop_D 22

Duration: - trademarks and brand names do not have finite lives (as long as they are in continuous use) - duration is not an efficiency concern - they continue to convey useful consumer information only as long as the property rights remain active – actively used trademarks and brand names foster quality competition 10/06/09 Prop_D 23