Lecture 7 - ratio test alternative to IP/prizes and Emperical evidence of IP design Flashcards
(17 cards)
Describe ratio test
refers to calculating the ratio of (DWL) to the innovator’s profit under different patent policies, then comparing those ratios to assess efficiency.
The ratio = DWL / Profit measures how much social cost (DWL) is created per unit of incentive (profit) to innovate.
comparing this ratio across policies, can identify which policy delivers innovation incentives at a lower societal cost. Therefore higher efficiency.
Advantages of prizes compared to patents
-REduced/zero dWL for monopoly patents.
-Clear incentices to innpvate
-Prizes can eb used to incentive basic research with no application.
-Private business/individuals can also offer prizes, eg) elon must pledging 100 mil
Advantages of patents comparing them to prizes
-Decentralisation: IP/patent protection is automatic, inventors are guarnteed monopoly rights.
-its impractical to offer prizes for every possible innpvation
-Costs are bourne by users not the tax payers:
-HowevrePubloc funding is more justified for innovations with broader social benefits. covid vacine
Describe prizes + examples
-Alternative to patents to incentivse innovation
-Deadwight loss from IP could be avoided if non-rival goods were provided by the gov for free, financed at tax payer ecpense.
-refer to Monetary rewards offered for solving a known problem, incentivizing innovation without monopoly pricing (e.g., Longitude Prize, Netflix Prize).
Elon Musk’s Carbon Removal Prize
Exampke of prizes) Longitude Prize Example
1714: £20,000 prize for determining longitude at sea, vital for navigation.
John Harrison created a reliable marine clock (19 years to develop) to track time and calculate longitude.
Initially rejected by the Board of Longitude, which preferred free, non-rival knowledge like astronomical methods.
Harrison was finally paid in 1773 after proving his clock could be replicated from instructions.
What determines the optimal prize value + risk of basing prizes of Rnd costs
It should be at least equal to R&D cost or ideally equal to expected monopoly profits (π), but exact π monopoly is hard to know beforehand.
-By basing prizes on RnD costs may encourage uncessary spending and doesnt compensate for failed previous attempts.
Describe patent options for inventprs
-Innovator can be given a choice to patent the tech or place it in the public domain, in exchange for a prize. The inventor will patent if prize is lower than monopol,y profits, pivt.
Eg) john hyatt invented celluloid with the intention of competitng for a prize. However realsied value of invention excedded prize value therefore pateneded it after a legal dispute.
Describe a patent buyout + benefti
-A patent buyout refers to when the goverment buys patents from inventors and places it within the public domain, paying an amount which reflects the innovations value.
-Patent buyouts aim to maximise incentives to innovate whilst minimising DWL providing the innovation to the public domain, knowledge sharing.
Example of a prize current market
Elon Musk $100 million for the XPRIZE Carbon Removal competition to incentivize solutions for removing carbon dioxide from the atmosphere. The competition awarded the grand prize of $50 million to Mati Carbon for their enhanced rock weathering (ERW) program.
Describe Kremers Patent Buyout Proposal (1998)
-Kremer proposed the following when determining how much to pay an innovator in a patent buyout:
After patent filing, it’s auctioned to rival firms. Small chance patent is sold to highest bidder.
Large chance patent goes public domain; inventor paid highest bid.
Auction reveals true innovation value.
Innovator can be paid the full social value (innovation value divided by discount rate) to maximize innovation incentives.
Describe whether expanding patent breadth and length increases innovation (Emprical evidence Japan 1988)
Japan widened patent scope and length in 1988
Result: No significant increase in R&D spending or patent quality/quantity.
Suggests broader patents don’t necessarily boost innovative effort or output.
Implication: Simply strengthening IP rights may not always stimulate more innovation; other factors influence R&D investment.
According to emprical evidence what prize structure best promotes innovation
-Graff Zivin and Lyons 2021 Compared one large prize vs multiple smaller prizes in a software contest.
Ran Randomized Controlled Trials (RCTs
Results where that the frequenc of innovation similar; one large prize led to higher novelty (25% increase, significant).
80% of participants preferred multiple smaller prizes.
Implication: Large rewards can encourage more novel breakthroughs, but multiple prizes may increase participation rates.
According to emprical evidence does IP protection Encourage innovation?
Buchanan & Wilson (2014): Lab experiment with rival (grey) and non-rival (colour) goods.
IP protection did not increase time spent innovating or total output value.
IP raised prices of valuable goods by 18%, but profits and output were not significantly affects
Therefore findings show IP protection may raise prices but doesn’t necessarily incentivize more innovation or effort in all contexts.
Eperical evidence on how patent expery effects drug prices?
-Data from 250 drugs in the Netherlands (199-2016) shows that the average price drop was around 40% two years after experiy, typically for popular drogs.
-This research shows how additonal comptition after experiy, no longer monopolist, lowers prices.
-Temporary monopoly, once expire more comp, lower prices.
Emprical evidence, how do software developers capture ‘value’ without protection from IP.
-Throguh a survey of 809 Apple Store developers (2009–2014).
-Study found 2/3rd use informal mechanisms like early entry and rapid innovation instead of legal protection.
-Which shows in fast moving industries like software, speef and market position can subsitute IP protection, effecting the nature in which innpvation is pursed.
Some key implcations/findings from emprical evidence
IP protection matters differently across industries and innovation types.
Broader or longer patents don’t guarantee more innovation.
Prize design can influence the quality and nature of innovations.
Informal protection and market dynamics sometimes substitute formal IP.
Policy design must balance incentives, access, and innovation outcomes.
Emperical evidence: according to survey of managers how important is IP protection
-Mansfield finds: Pharma & chemical firms say patents are critical for innovation; less so in other industries.
-Graham et al. (2009): Patents important in biotech and medical devices; software firms rely more on copyrights/trademarks.
-Common theme is ip protection is essential in industrys with high rnd costs, and incentives to patent innovations differ by industry.
