Transcript economic foundations of intellectual property rights

ECONOMIC FOUNDATIONS OF
INTELLECTUAL PROPERTY RIGHTS
Towards an Agenda for the New
Administration
Trans Atlantic Consumer Dialogue Workshop
Washington, D.C.
January 12, 2009
Joseph E. Stiglitz
Innovation of Key Importance to
American Economy
• Financial Sector has been battered
– Viewed as highly innovative
– But innovation was not directed at enhancing overall economic
efficiency
– Partly related to distorted incentives, partly related to failure of
government to perform its role
– Sector didn’t manage risk, allocate capital well
• Maintaining Hi-tech, research sectors, and more
generally maintaining an innovation economy, is central
to America’s long run success
– Distortions in incentives, failure of government may be
undermining this vital sector
– Reforms are badly needed
Similar source of failings
• Reliance on simplistic economic models
• That did not understand role of
government
• Influenced by corporate interests
– Economic ideology used to buttress those
interests
Global Perspectives
• Our aggressive pursuit of “strong”
(TRIPS+) intellectual property (e.g. data
exclusivity) has hurt developing countries
and undermined our global standing (“soft
power”)
– Reinforcing adverse image
– Putting corporate profits before more
fundamental values
Outline
• Role of intellectual property
• Adverse effects on static efficiency
– Key concept: knowledge as a global public
good
• Adverse effects on dynamic efficiency
• Other problems of patent system
• A Portfolio Approach towards Constructing
an Innovation System
The role of intellectual property
• Part of society’s innovation system
• To provide incentives to innovate
– By allowing innovator to restrict use of that knowledge
– Thereby obtaining a return on his investment in knowledge
• There are other parts of society’s innovation system
There are other ways of financing and producing research
– Universities, government supported research labs
– Open source movement
– Financial returns are only part of incentive system of scientists
– In many areas of research (basic science) patents play small role
There are other ways of providing returns on knowledge than patents
– Trade secrets, first mover advantage
There could be still other ways of providing incentives
– Prizes
Key question
• The role of the patent system within this broader
innovation system
• The design of the patent/ipr regime
– What can be patented, breadth of patent, standard of novelty,
etc.
– Procedures for granting patents/challenging patents
– Rules for patent enforcement
– Responsibilities as well as rights—requirements for disclosure
– Restrictions—not to engage in abusive anti-competitive
behavior; compulsory licenses
• How these questions are answered can affect the
efficiency of the economy and its innovativeness
– There are large costs to the current patent system
– Are there reforms which would improve its efficiency?
IPR and static inefficiency
Knowledge as a public good
• Fundamental problem is that knowledge is
a public good
– In fact, it’s a global public good
• no marginal cost associated with use
• intellectual property circumscribes its use
and thus necessarily causes an
inefficiency
But not only does IP create a
distortion by restricting the use of
knowledge
• They create an even worse distortion—a (temporary)
monopoly power
– Social costs of distortion especially high in the case of life-saving
drugs
– IPR is often used to leverage (further) monopoly power
(Microsoft)
• Long history--automobile
• Ordinarily, property rights are argued for as a means of
achieving economic efficiency
– Intellectual property rights, by contrast, result in a static
inefficiency, justified by the dynamic incentives
– Any method of raising funds has a social cost, but patent system
is not “optimal” way of raising money (not optimal tax)
• Recent advances in industrial organization suggest that
costs may be far higher than previously thought
– Schumpeter was wrong about temporary nature of monopoly
– Monopoly power once established can easily be perpetuated, i.e.
it may create persistent monopoly power
– Particularly evident in case of network externalities, switching
costs (including “learning”)
– Other impediments to research posed by patent system
• And that benefits may be lower than previously thought
– Incentives for R & D may be less
– Distortions in the direction of research
Further costs
• High administrative costs (patent suits)
• High levels of uncertainty
– Intrinsic uncertainty of research
– Compounded by risk of patent infringement
• Risk of litigation
• An inefficient way of raising revenues to
finance research
Losses of dynamic efficiency
• Question—can one obtain dynamic benefits at
lower static costs?
• Worry: The patent system may even be slowing
down the pace of innovation
• Fundamental problem: rewards do not
correspond to marginal social returns
– Marginal social return is having the innovation
available earlier than it otherwise would have been
• Contrast clear in case of human genome project
– Much of returns can arise from “enclosing commons”
• In this case there is a cost, but no benefit
• Evident in controversy over bio-piracy
Why patents may slow innovation
• Knowledge is the most important input into the
production of knowledge
– Especially of concern when patents involve ‘enclosing
the commons’
– Intellectual property rights restrict access to
knowledge
• Incentives for innovation with monopoly less than in
more competitive market place
– Monopolist can increase profits by discouraging
innovation by rivals and raising rivals costs (Microsoft)
• Patent conflict (patent thickets) can impede innovation
– Development of the commercial airplane
– Boundaries of “property rights” raise difficult problems
• Important to develop further theory of design of ipr with fuzzy
boundaries
• Patent races may not be the spur to innovation once
thought (Stiglitz, 1988, Dasgupta and Stiglitz)
• Issue is not just level of research, but direction
– Much of R &D activity directed at circumventing or
strengthening monopoly
– Not at creating new products and lowering
costs which enhance welfare
IMPLICATION: STRONGER INTELLECTUAL PROPERTY
RIGHTS MAY NOT LEAD EVEN TO FASTER PACE OF
INNOVATION
PROMOTING INNOVATION
THROUGH STRENGTHENING
OUR INNOVATION SYSTEM
Key tasks facing Innovation system
• Selection of projects and researchers
• Financing
– Knowledge is not costless, so there has to be
some way of financing it
• Risk absorption
• Incentivizing
• Dissemination
Key attributes in evaluating
different parts of innovation system
• How well they perform these roles
• Costs they impose on the economic system
– Patent system’s high transactions costs
– Transactions costs
• Well designed innovation system will be a mixed
system—a portfolio approach
– But are we relying too heavily on the patent system?
– And is the patent system well designed for achieving
the objectives?
Critique of patent system
Besides large static and dynamic distortions
• Finance
• Bias towards excessive patenting
• Inequities
• Problems posed by legal system
• Concerns of developing countries
Finance
• REVENUES FOR RESEARCH
PROVIDED BY MONOPOLY PROFITS
• DIFFERENCE BETWEEN PRICE AND
MARGINAL COST CAN BE VIEWED AS A
‘TAX’
– ONE DESIRABLE PROPERTY: ‘BENEFIT
TAX’
– BUT IN MOST OTHER ARENAS, ONLY
LIMITED RELIANCE ON BENEFIT TAXES
• INEFFICIENCY AND INEQUALITY
Bias towards excessive patenting
• Fighting a patent creates a public good
(open access)
• While patenting knowledge makes a public
good private
• There will be underinvestment in fighting
bad patents
• Problem can be exacerbated by bad
procedures
– Europe’s processes may be preferable
INEQUITIES ASSOCIATED
WITH IPR
• KNOWLEDGE AS A GLOBAL PUBLIC
GOOD
• SHOULD BE FINANCED BY THOSE
MOST ABLE TO PAY
• IPR DOES NOT RECOGNIZE
DIFFERENCES IN CIRCUMSTANCES—
OTHER THAN EXTENT TO WHICH
PROFITS CAN BE EXTRACTED
LEGAL SYSTEM CAN LEAD TO
UNFAIR OUTCOMES
• HIGH COSTS OF IMPLEMENTING IPR
• INCLUDING HIGH COSTS OF CHALLENGING
PATENTS
– PUTS DEVELOPING COUNTRIES AT A
DISADVANTAGE
– EXACERBATING RISKS OF BIO-PIRACY
• PRESSURE NOT TO ISSUE COMPULSORY
LICENSES AND TO HAVE STRONG IPR
REGIMES REINFORCED BY INTERNATIONAL
ECONOMIC INSTITUTIONS AND ‘MARKET’
Concerns of developing countries
• KNOWLEDGE AS A GLOBAL PUBLIC GOOD
– SHOULD BE FINANCED BY THOSE MOST ABLE TO PAY
– IPR DOES NOT RECOGNIZE DIFFERENCES IN
CIRCUMSTANCES—OTHER THAN EXTENT TO WHICH
PROFITS CAN BE EXTRACTED
• CURRENT SYSTEM PROVIDES LITTLE INCENTIVES FOR R & D
ON DISEASES THAT AFFLICT THEM
– PART OF PROBLEM OF BEING POOR IS THAT YOU CAN’T
PAY MUCH
• WHAT SEPARATES DEVELOPING AND DEVELOPED
COUNTRIES IS GAP IN KNOWLEDGE
– TRIPS HAS MADE IT MORE DIFFICULT TO CLOSE THAT GAP
– TRIPS should never have been part of WTO
• AT THE SAME TIME, PROVIDES LITTLE
PROTECTION FOR THEIR INTELLECTUAL
PROPERTY (BIO-PIRACY, PROTECTION OF
BIODIVERSITY)
• DEVELOPING COUNTRIES HAVE CALLED
FOR A DEVELOPMENT ORIENTED
INTELLECTUAL PROPERTY REGIME
– There is no reason to expect that the design
of an IPR system which balances costs and
benefits which is optimal for the U.S. would be
optimal for a developing country
– WTO could have provided effective
flexibilities, in the case of life saving
medicines, if it had wanted to
PRIZE SYSTEM AS AN
ALTERNATIVE
• Current system is a prize system
– Prize is monopoly power
– Monopoly power means that there are incentives to restrict use
of knowledge
• Prize associated with actuarial value of the social
benefits, with licensing
– Competitive market would ensure more efficient dissemination
– Without waste on advertising, other anti-competitive behaviors
design to enhance monopoly profits
– Prize could be “contingent”—related to sales
– Contingent purchase funds preserve monopoly system
Comparing alternative systems
patent
prize
Government
funded
selection
Decentralized,
self-selection
•Lacks
coordination
Decentralized,
self-selection
•Lacks
coordination
“bureaucratic”
•But can be more
coordinated
Finance (tax)
Highly
distortionary and
inequitable
Can be less
distortionary and
more equitable
Most efficient
risk
Litigation risk
Less risk
Least risk
Innovation
incentives
Strong but
distorted
Strong, less
distorted
Cannot work
when objective is
not well-defined
Dissemination
incentive
Limited-monopoly
Strong—using
competitive mkts
Strong
Transaction costs
high
Conclusions
• The importance of IPR has been exaggerated
• IPR needs to be seen as port of a portfolio of instruments
• We need to strengthen the other elements of this portfolio
– Including making more extensive use of prizes
– Obama has emphasized role of investments in stimulus
– Investments in R & D, basic research, and technology need to
be given more prominence
– Can address social needs, both in health and environment
– Need global cooperation to support research that is of
importance to developing countries
• We need to address other failings in our innovation system
– Testing of drugs/medicines
Conclusions
• We need to redesign IPR to increase its
benefits, reduce its costs
– Encouraging open source
– Reduce bias towards overpatenting
– Introduce liability system
– Reduce scope for evergreening
– Reduce scope for bio-piracy
Conclusions
• We need to create a development oriented
intellectual property regime
– Recognizing that intellectual property should not be
included in trade agreements
– Recognizing the concerns of developing countries for
the protection of traditional knowledge
– Recognizing the importance of closing the knowledge
gap
– Attentive to differences in circumstances of different
countries
These reforms may create a more dynamic and a more
equitable global economy