Economics and patents

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Patent law
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Patents are legal instruments intended to encourage innovation by providing a limited "monopoly" to the inventor (or their assignee) in return for the publication of the details of the invention protected by the patent. Innovation is encouraged because an inventor can secure exclusive rights, and therefore financial rewards in the market place, in return for the development and disclosure of new technology. There are arguments that rather than encouraging market development, patents actually hinder it by the creation of artificial monopolies. Also, consider that the same invention kept as a trade secret, rather than disclosed, could prove valuable well beyond the time of any limited patent term.

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[edit] Macroeconomic perspective

The patent system has an impact on the economy as a whole. The benefits of new research, once the research is publicly known, are available to the whole economy in the relevant field, thereby bringing advantages to all parties in that field, and hence diluting the benefit to the party performing the pioneering research. Research is an expensive process and due to this dilution of benefit, a party is unlikely to redeem its expense. This reduces economic incentive for a party to conduct research and innovate.

The grant of a patent, however, provides the inventor with an exclusive legal right, thereby securing a means to redeem the costs of research (by charging a higher price for its invention or by license fees from others who wish to practice it). Invention and the art is thereby advanced as people are encouraged to research and invent by the financial rewards of doing so, and by what they learn from patents filed by others.

The effects of patents on a given market may vary widely according to the type of market, and whether there are other barriers to entry (e.g., business methods versus regulated medications).

[edit] Microeconomic perspective

The economics surrounding a single patent, or group of patents, revolves around the balance between the expense of obtaining and maintaining the patent(s), and the income derived from owning that/those patents.

Income from a patent is difficult to measure because a patent is an exclusionary right - preventing others from entering the market - and so its effect may be to increase the patent proprietor's income from that market. However, it is difficult to determine what that increase is, especially if the inventor never markets the product. One may attempt to measure the difference in price of an "improved" product patent, or compare with the price of the product in markets where (or when) it is not patented. More directly measurable income is that which is received from the licensing or sale of patent rights, or from successful litigation of infringement.

The right to exclude others from entering your market is, however, potentially extremely valuable as it can mean total exclusivity in that market for the duration of the patent (generally 20 years from filing). For example, worldwide sales of a patented pharmaceutical can be millions of dollars per day, whereas the generic equivalent sells for less than half the price. A good example of the financial rewards available to the small business from excluding large competitors from a market is the success of the Dyson vacuum cleaner.

[edit] Patent valuation

Patent value, like value of other property, may fluctuate over time, as markets change. What was once a pioneering invention may be soon outsold by an unpatented (and non-infringing) competitor catering to fringe adopters with products having features even more desirable than the invention. Contrarily, a strong patent grip could stagnate a narrow market as innovation is no longer justified, eventually resulting in reduced demand (for outmoded and over-priced products), and thus reduced patent value, as the market moves away.

A particularly difficult question of value arises where inventors/owners use their patents to extract other advantages without actually marketing the invention (e.g., cross-licensing of related patents to avoid litigation, or suppressing a technology that could compete with the owner's other products). How can one determine the value of a patented product (and the underlying patent) that has not actually been produced, let alone sold in any quantity? Furthermore, many products incorporate numerous patented inventions (owned or licensed), and may carry exclusive trademarks, making it difficult to attribute a specific value to an individual patent. Would the same invention be as valuable if owned and marketed under a weak brand?

In 2005, the European Commission published a comprehensive study of the value of patents for patent owners as well as for the European economy. The title of the survey was “Study on Evaluation the Knowledge Economy – What are Patents Actually Worth?” Ref. The study was in part based on a survey of 20,000 patent owners who filed EPO patents between 1993 and 1997. The survey was performed in 2003. 9000 patent owners responded. The patent owners were asked how much effort was required to produce their inventions and how much monetary value their patents had been worth. The median effort to create the patentable invention was 1 person-year, with 10% of the patent owners requiring 2 or more person-years. The median value of the patents produced was €300,000, with 10% of patent owners reporting values of €10 million Euros or more.

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