Lecture 6 - Design of intelectual property Flashcards
(22 cards)
Define disruptive and developing/sustaining innovatoon + what drastic/non drastic means for cost
-Drastic significant innovation wheere cost becomes so low becomes monopolist.
-Non-drastic other firms still remain in the market/compexits
-Disruptive innovation thatrefets to innvation that creates a new market eventually displacing already established products.
-Developing innovation refers to Improving existing products or services with incremental upgrades.
Difference between utility and design patents
Utility patents: Protect how something works (must be useful and new)
Design patents: Protect only the product’s decorative look (must be new, original, and ornamental).
-Design patents last around 15 yers uS and 25 in UK.
What does IP protect
-IP protects information goods (produced/replicated at 0 costs), such as music, software etc.
-Protects knowlege goods (info on how to produce product/service )throguh patents
-Knowledge and info goods are public.
-Grants innovators exclusive rights regarding use of product/process, incentivising innovation.
Challenges with IP/production of info goods + solutions
-Public goods and market failure:
-Without ip protection there is a lack of incentives to create information goods, due to copyrighhting and others undercutting.
-This lack of protection leads to market failure, underproduction of info goods.
-Efficiency
-Markets said to be eff when P = MC, info goods have high fixed costs but low/zero MC. If MC = 0 then market eff but creators cant recover fixed costs, therefore ineffeicy in market if fixefd costs can be recovrered, info goods not producted.
-Soltuions: patents, gov production, prizes, public sponsership.
Describe DWL for patents + draw grapg
-Assume an innpvations value per year is v, full benefit if P = 0.
-The patent allows moonopoly price Pm and assume Profit + consumer benefit + dWL = 1.
profit + m + l = 1.
-Assume the patent lasts T years and future profits are discounted by a rate R.
-Therefore total proft, as a result of patnent, = Profit PI * v * T, where T is discounted patentn length.
-DWL given by l * v * T.
-Therefore shows patents reward innvoations allowing firms to earn monopoly profits however lead to DWL’s higher prices lower output.
Describr price discrimination and link to patents/DWL
Patents create DWL, DWL occurs as the monopolist charges one price to all, but if firm charhed each buyer willingness to pay there would be no DWL (everyone could buy).
This is theoretically efficient but may feel unfair unless profits are shared fairly.
Raises some Practical problems: its hard to know everyone’s willingness to pay and prevent resale/arbitrage.
Goals of IP design + potential limnitations
Policymakers decicde length and breadth/scope of patents.
-Encourage innovation providing incentives, high dynamic efficiency.
-Minimise/Avoid DWL to promote market efficinecy (static efficinecy)
Too little protection → no incentive to innovate might kept secret (e.g., Amazon’s one-click patent ).
Too much protection → patents can unfairly block competition unnecessarily (e.g., Chamberlen family kept obstetric forceps secret for 150 years)
Describe the idea generation model
-Model of innovatoon which assumes that any person in the world has some chance of coming up with a new innovative idea
-Each ‘ idea’ is made up of two factors:
V=. The social value/benefit generated per year if the idea is developed and supplied competitively.
C = cost required to develop the idea into a usable innovation.
Define patent length + graph
The duration for which a patent protects an inventionLonger patent length increases the time to earn monopoly profits but also raises social costs like deadweight loss.
-use profit/social value function to show how Both curves slope upward but at a decreasing rate (concave), showing profits and social value grow with longer patent length but with diminishing returns.
How is the profit value function and social value function dervied
By multiplying the monopoly profit per period (π), the per-period social surplus of the innovation (v), and the discounted patent length (T).
Profit = pi * v* T, discounted profit
P(n)Pi = 1-pn * pi* v *t
Social, value function is the social benefit from the innovation discounted reffering to the per-period social surplus (v) divided by the discount rate (r), minus the discounted deadweight loss from patent protection (l v T).
P(n)s = (1-Pn)* v/r - vlt
Show graphically the profit and social value function and cost and what it shows/equibirium
How does patent length effect profit value function
Longer patent length shifts the profit value function curve upwards (shorter/downwards)because it increases the total discounted profits available from an innovation. Making investment in innovation more attractive
Is the socially optimum level of entrants no always less than Ne equiblirum level grpahically
-Socailly optimum level of entry given be no is the level of entrants that maximises the difference between socail value curve/social benefit and costs/cost curve.
when ne > no, excess entrants therefore wasteful duplication.
How would a social planner prevent excess entry and get closer to socially optimum level
-Prevent excess entry n0 optimal entrants would have to equal the equiblirum therefore profit value functoon P(no)pi = noc.
Which si
1-pno)PiVt = cno
Patent desinger must be able to identift the socially optimnum level and tailor the patent length to make sure equiblium is the socially optimium level.
Describe the equiblirum number of entrants when dealing with the profit and social value funcitons
-Firms will continue to enter as long as the industry is profitable. Assume the cn curve total costs from n entrants.
When profit value functon = cost function
Equiblirum occurs when cn, cost = /interecepts the profit value function, at this point no firms are incentivesed to join or exit.
P(ne)*pi = cne
What does social value function and profit value function show
-Profit value fuinction given by:
P(n)Pi = (1-pn) piVt
and shows the total discounted expected profits from dvelopining an innovation when n firms compete.
piVt is discounted monopoly profits
1−pn is the probability at least one succeeds, Pn being prob of failute.
-Both Concave and display dimishing returns to n firms. more detail…
Social value alway sgreater than profit as can never exceed social, value.
Social avlue function shows the total expected and discounted value of social benefir/value from the innoation considering patent protection and subtrcting DWL.
given by:
P(n)S = (1-pn)(v/r - vlt)
Define patent breadth
-patent breadth refers to the scope of a patent and how widely it protects the invention.
-Refers to how easy/hard it is for others to make similar products without infringing.
-Broader patents give stonger protection. Narrower easier to invent around –> more comp
How is patent breadth modelled and consequences of broader patents?
-Moddled as the cost of inventing around the patent, ie the cost to legally/without infringing eenter the market with a simialr product.
Broader patents:
-Increases patent holder’s profits by excluding more competitors.
-higher market prices/lower comp
-Breadth varies by nations/product
Describe the assumptions/how to solve patent breadth model
-2 stages
-One firms is the innovator and holds the patent.
-Assume other firms can enter market by working around the breadth of the patent at cost K.
-Market price p = a - sum of all firms quantieis.
-Solve the 2nd stage cournot to find equiblirum profits/q*.
-Use this value/ experssion for equilbirum a-c / n +1 all squared and set = k.
-Firms will enter until becomes unprofitable todo so, until K = equiblirum profit.
Effects of patent breadth in terms of model
-A broader patent, Larger K means harder to work around/invent around
Broader patents higher K reduce the number of competitors, leading to higher prices and lower consumer surplus, lower static efficiency.
Broader Patenet –> patent holder’s profits increase, supporting dynamic efficiency.
The patent holder can earn more than 𝐾 by licensing the technology to the other n-1 firms at a fee equal to 𝐾.
Licensing improves efficiency by avoiding the socially wasteful cost of inventing around the patent
Case study) Patent Breadth -
Design patents use solid lines for claimed features and dashed lines for unclaimed ones.
More dashed lines mean a broader patent, more protection.
Apple’s original iPhone patent was narrow (mostly solid lines).
Apple later broadened it by turning some solid lines into dashed lines.
The broader patent helped Apple win infringement claims against Samsung’s Galaxy S 4G.
Broader patents increase protection but can limit competition.
Describe the results after solving the breadth cournot model and how many firms will enter at cost K to work aroun dpatent
-Solve second stage first and find equiblirium profits Pi*.
-Profit function is for firm i is:
qi = qi(a - qi - sum of other firms quantieis qj) - qi C
Leads to FOC involcing the sum of firms other than i’s quantities.
Assuming symmetry, all firms produce same q in equibilrium following resuts:
-q* = a-c / n + 1
-P* = a + cn / n + 1
-Pi* = same as profit formula leaving: (a-c / n + 1)^2, all squared.
In the first stage, firms that don’t own the patent will
pay K only if stage 2 profits exceed K, therefore entry will stop K exceeds the profits.
Therefore optimal number of firms n* must satisfy/solve for
K = (a-c / n + 1)^2
leads to n* = (a-c)/rootK - 1
-Interpet, firms will enter working around patent at cost K until industry profits in second stage dont exceed K, until profitable todo so.
