Coase, the Internet, and a Market for Ideas
The Internet is changing the economic costs and benefits of many activities in our society. The economics of innovation are changing too. The result could be the emergence, for the first time in history, of an efficient market for ideas.
Before the Internet, we lived in a world in which the transaction costs of reaching an agreement over who, how, and when an idea would be used for profit were usually expensive relative to the benefits of coordinating the commercialization of that idea. Even after a system of property rights was established through patent law, many companies found the cost of obtaining and enforcing patents -- not to mention the cost of avoiding or paying for other companies' patent rights -- high relative to the benefit of exclusive rights to a market for a limited period of time. Inventors have generally chosen to assign by contract the rights in their ideas to an employer in exchange for a paycheck. Companies have often chosen to maintain their ideas a secret, opting out of the costs of procurement and assuming the risk of unmitigated competition. Only companies from a select group of industries -- industries that can generally be characterized as extreme in both capital requirements and vigorous competition -- have chosen to obtain and enforce property rights in ideas.
The Internet is now causing a massive shift in the balance of the costs and benefits of our system of property rights in ideas. Ronald Coase is famous for advancing the hypothesis that in a world in which there are no transaction costs, an efficient outcome will obtain regardless of the initial allocation of property rights. Transaction costs, of course, are never zero in the real world. But Coase's Theorem is useful because it tells us to expect markets to emerge as transaction costs become small relative to the gains from trade.
The transaction costs of our system of property rights in ideas has hardly vanished because of the Internet. Yet the Internet is dramatically diminishing these transactions costs. The costs of searching for prior art, freedom to operate, and ownership information may have dropped the most because of the public availability of search algorithms, and databases of patent disclosures and assignments. But even the costs of communicating ideas has dropped as the Internet has enabled us to send a mindboggling array of media around the world in an instant.
Imagine how this shift in economics could aid our government in "promoting the progress of science and the useful arts" if, instead of narrowing the scope of property rights in ideas, we were to broaden and strengthen the system by tailoring these property rights to correspond to the economic value that inventors contribute to our economy. The emergence of a market for ideas would level the playing field for independent inventors and startup companies in their attempt to compete with big business. Whatever else we see emerge from patent reform, here's to the hope that our reforms will promote the emerging market for ideas.
UPDATE: click through to see the charts published in Bessen and Meurer's new book, Patent Failure. The fact that litigation costs increased for non-drug companies but not drug companies starting in the 1990s could be the result of increased demand for litigators because of the drop in transactions costs associated with patent procurement set in motion by new communication technologies, including the Internet.
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