Liveblog: TACD IP: Patents and Innovation

The next panel is on patents and innovation. First is Joseph Stiglitz, Columbia University.

• Maintaining an innovation economy is central to America’s long run success. The financial sector relied on overly simplistic economic models, didn’t understand the role of government, used economic ideology to prop up its interests. The high tech and research sectors face similar challenges.
• Our pursuit of more protective (TRIPS plus) IP policies has hurt developing countries and undermined our global standing — makes us seen as putting profit before more fundamental values
• IP is part of society’s innovation system — gives incentives to innovate. But there are other parts of the innovation system. Other models of financing and production: public/foundation/etc. funding, open source. Other ways to provide financial incentives: trade secrets, first mover advantage, [reputation], prizes.
• Role of patent system within broader innovation system. Details of the system can affect the efficiency of the economy (e.g. patentability, etc.)
• Static inefficiency: knowledge is a public good; limiting its use necessarily causes an inefficiency. Social costs of market distortion (by monopoly power) are especially high in the case of life-saving drugs. Long history of leveraging IP monopoly rights (Microsoft, automative industry). Monopoly power, once established, can easily be perpetuated — particularly evident with network externalities, switching costs (including learning). There are also high administrative costs (patent office, suits), high uncertainty
• Can dynamic benefits be obtained with lower static costs? Concern that the patent system may actually be a net drag on innovation. Problem: rewards don’t match the marginal social returns.
• Why patents may slow innovation: knowledge is the most important input into the production of knowledge (accretion). Incentives for innovation with monopoly less than in a more competitive marketplace — cheaper to discourage competitors’ innovation and raise rivals’ costs than to innovate yourself [rent seeking]. Patent thickets can impede innovation. WWI: created patent pool for airplanes [whoa! didn't know that]. Boundaries of property rights can cause significant inefficiencies, but patents have fuzzy boundaries. Patent races may not be as effective at spurring innovation as previously thought. Direction, not just quantity, of R&D matters — may be directed at circumventing or strengthening monopoly, rather than developing new products.
• Strengthening the innovation system: Selection of projects and researchers; financing; risk absorption; incentives; (dissemination?). Need a mixed (“portfolio”) approach. We may be relying too heavily on the patent system — and the patent system may not be well-designed for its objectives.
• Financing: You need money; with patents, the funding for R&D comes from monopoly profits — a “tax”.
• Bias toward excessive patenting: Fighting a patent is a public good, but creating a patent makes a public good private; so underinvestment in fighting bad patents.
• Inequities associated with IPR
• Legal system can lead to unfair outcomes: high cost of implementing IPR. Includes the high cost of challenging patents — puts developing countries at a disadvantage (cf. “bio-piracy”). Problems of implementing compulsory licenses.
• Developing country concerns: Little incentive for R&D on neglected diseases. TRIPS has made it harder to close the knowledge gap, but with few protections for the “resources” which are plentiful in developing countries.
• Alternative: prize system. Currently: prize is monopoly power = incentives to restrict use. We could instead have prizes that return the social benefit of the innovation without the drag on follow-on innovation.
• Advantages and disadvantages of patents, prizes, and government funding, thus suggesting the benefits of a balanced portfolio.
• Recommendation: Obama’s stimulus should include more for R&D, rather than infrastructure.
• Need global cooperation to support research of interest to developing countries. And need to address other failings in our innovation system, e.g. regulation of medicine.
• Need to redesign IPR to increase benefits and decrease costs. And need to do development-oriented IP regime

[Stiglitz is an engaging and organized but rapid-fire presenter. I could easily follow along -- maybe also because I've woken up more fully -- but sometimes it moved too quickly to jot down.]

Q&A:

• Perens hits on the link between FDA approval for medicines and the patent system — must secure patent to pay for the cost of testing. Stiglitz: Conflict of interest in drug manufacturers doing own testing. Public funding also important.
• Shaver: Does your critique of patents vis-a-vis basic research also apply to more applied research (the “D” in “R&D”)? Stiglitz: Large spillovers from any research — larger spillovers from more basic research (higher cost for enclosing). Patent system more relevant for applied research than for basic. For well-defined objectives (e.g. testing for breast cancer), prize system may be effective. [Well-defined objectives = well-defined beneficiaries = natural lobby group?]

Next: Eric Maskin, Institute for Advanced Study. [He's using overhead slides. When was the last time I saw an overhead projector?]

• Natural experiment: When software patents were affirmed, patenting increased, but innovation didn’t.
• For some industries, on average, the standard logic of patents may be correct. In others, patents may harm innovation.
• What makes some industries (e.g. software) different? Innovation is sequential, and research efforts are complementary. [Is that different than other industries?]
• Standard logic: Patent holder can license to others, e.g. to subsequent innovators. So if use of a patent innovation is socially beneficial, the patent holder will license it and make money from it. Problem: patent holder is a monopolist — no competition — license fee will be too high. [Also: transaction costs?]

Q&A:

• How much of this applies to copyrights too? Maskin: Patents are a blunter instrument, but much is similar. Stiglitz: Patents may have greater social impact (e.g. medicine), and may be more sequential, but much is similar. Response: Sequentiality — jazz? documentary film?
• Today, big businesses largely use patents against each other; whereas small businesses use them against big businesses.
• How well does the public funding model work for applied research?
• Can economic analysis account for more than just how much money innovation will make?
• Stiglitz: Private sector isn’t necessarily more efficient than the public sector (cf. financial crisis). Most people work in large organizations: little congruence between individual motivation and social reward. Average return on public sector research higher than private sector.
• Maskin: Harder to measure outputs than R&D inputs, but can be done when there are well-defined goals.
• How can we draw a line of patentability? It’s hard, and we need data — but we shouldn’t assume that more patents is better.
• Question about piracy. Piracy is another name for imitation. We want incentives for countries to preserve their biodiversity — U.S. companies say that incentives are important for them to develop new drugs, but we shouldn’t sign the biodiversity treaty, so they don’t have to pay.