Last year Professor Bessen coauthored a book with Michael Meurer titled Patent Failure, which purported to demonstrate that the patent system was an inefficient mechanism for promoting innovation. See an earlier summary here. Besides its sensationalist title, the book suffered from the fact that its empirical data ended in the 1990s, and looked only at the effects of patents on large corporations, which are always going to be net payers for IP.
Bessen is back now with a Nobel laureate coauthor, and a new line of attack on the patent system. See here:
How could such industries as software, semiconductors, and computers have been so innovative despite historically weak patent protection? We argue that if innovation is both sequential and complementary—as it certainly has been in those industries—competition can increase firms’ future profits thus offsetting short-term dissipation of rents. A simple model also shows that in such a dynamic industry, patent protection may reduce overall innovation and social welfare.
What's the simple model? A geometric series. That is indeed simple!
Formally, consider an infinite sequence of potential innovations, each of which makes the previous generation obsolete and has incremental value v over that generation. Given that the generation t innovation has already been developed, a firm that incurs R&D cost c and participates in the generation t market has positive probability of discovering the generation t+1 innovation. If there is just one firm attempting to innovate, this probability is p. If this firm undertakes R&D in every generation, the expected number of innovations is: [a geometric series in p].
This is not a useful model to employ in analyzing the dynamics of innovation. The problem is that the model starts with the assumption that some innovation exists with probability p before proceeding to calculate the probability of follow on innovations from there. The most interesting question in patent and competition law is the question of how that first innovation got there. Of course patents make licensing follow on innovations more expensive.
Readers of Broken Symmetry were fortunate enough to have Michael Gollin, author of Driving Innovation on recently, to hear a more nuanced albeit less mathematical view on how innovations get there in the first place. See introduction for Michael Gollin here, and click through at the top to read replies. As Mr. Gollin explains in his book:
Competition drives many innovators. . . . Competition drives many artists, too. It is narrow-minded or naive to suggest, in hindsight, that there was no need to provide an incentive or reward in these close races on the theory that one or the other of these innovators would have reached the same result eventually. This is like watching one runner cross the finish line behind another and concluding that because they were both running that there was no need to organize a race. Without the race, neither would have run as fast, if they ran at all. The question is not just whether people will innovate as quickly, but whether they will do innovative work at all. When there is a race, especially one with a prize, people join in, and it is natural for them to want to win, and that drives them to move quickly. Patents and other intellectual property help encourage innovation races.
Unfortunately, Bessen and Maskin, like so many others, fail to adequately account for the opportunity cost of not having a competition at all. On the plus side, it is heartening to see academics moving away from the modified neoclassical paradigm accepted as gospel in the law and economics community.
But perhaps even worse than the simple model is their facile treatment of the "evidence" to support its conclusions:
A survey of company executives concluded “...all company officials interviewed agreed that no company had ever been prevented from entering the semiconductor business because of patents, nor had any company ever been refused a patent license."
Give me a break guys. What else were they going to say? Couldn't they at least have addressed the point that semiconductor and software were more capital intensive in real terms during this time period?
But I sympathize with their predicament here. It really takes some creative modeling to explain how the software and semiconductor industries have had less R&D spending and productivity growth over the past couple of decades than they did before. That's not a proposition that I would want to try to prove.