Do Patents Encourage Innovation and Productivity Growth?
While studying microeconomics we learned about the four different market structures including monopoly. That specific market structure is based on three assumptions: there is one seller, it sales a product for which no close substitutes exist, and there are extremely high barriers to entry. In theory of monopoly, we assume it is very hard (if not impossible) for a firm to enter the industry. Extremely high barriers keep out new firms. If a firm is a single seller of a product, why don’t other firms enter the market and produce the same product?
Legal barriers, economies of scale, or one firm’s exclusive ownership of scarce resources may make it difficult or impossible for new firms to the market. Legal barriers include public franchises, government licenses, and patents. Patents as legal barriers prevent entry into an industry by granting exclusive use of the patented product or process to the inventor. Patents provide one example of a government-enforced regulation that creates monopoly.
In this research paper we explore other aspect of patents not only on monopoly market but also on economy as a whole searching for evidence if they serve to increase innovation and productivity, examining whether introducing or strengthening patent protection leads to greater innovation. Does more patenting lead to more productivity? In this very short paper we try to answer both questions.
There is no empirical evidence that they serve to increase innovation and productivity, unless the latter is identified with the number of patents awarded – which, as evidence shows, has no correlation with measured productivity. That is clearly stated in Boldrin and Levine  and is the root of the “patent puzzle”: in spite of the enormous increase in the number of patents and in the strength of their legal protection we have neither seen a dramatic acceleration in the rate of technological progress nor a major increase in the levels of R&D expenditures.
Innovation and Patent Practices
In the United States, patents are granted to inventors of a product or process for a period of 20 years. During this time, the patent holder is shielded from competitors; no one else can legally produce and sell the patented product or process. The rationale behind patents is that they encourage innovation and productivity in an economy. It is argued that few people will waste their time and money trying to invent a new product if their competitors can immediately copy the product and sell it. Patents also provide an incentive for invention and innovation.
New products and new processes are developed through research undertaken by individual inventors and by firms. Research requires resources and time, which have opportunity costs. Without the protection that a patent provides, the results of research would become available to the general public quickly. If research did not lead to expand profits, little research would be done. On the negative side though, patents do serve as a barrier to competition and they slow down the benefits of research flowing through market to consumers.
The expiration of patents after maximum 20 years represents an attempt to balance the benefits of firms and the benefits of households. On the one hand, it is important to stimulate invention and innovate; on the other hand, invention and innovation do society less good when their benefit to the public is constrained.
Patenting has exploded over the last decades. In 1983 in the U.S. 59,715 patents were issued against 105,704 applications; by 2003, 189,597 patents were issued against 355,418 applications and, even in a slow growth year like 2010, 244,341 new patents were approved. In less than thirty years, the flow of patents roughly quadrupled. By contrast, neither innovation nor R&D expenditure have exhibited any particular upwards trend, not to speak of factor...
References: Aghion P., Bloom N., Blundell R., Griffith R. and P. Howitt , “Competition and Innovation: An Inverted U Relationship”, Quarterly Journal of Economics 120:701-728.
Boldrin, Michele and David K. Levine ,”The Case Against Patents”, Working Paper Series, Federal Reserve Bank of St. Louis
Boldrin, Michele and David K. Levine ,” Perfectly Competitive Innovation”, Journal of Monetary Economics.
Boldrin, Michele, Juan Correa Allamand, David K. Levine and Carmine Ornaghi , “Competition and Innovation”, Cato Papers on Public Policy, Vol. 1.
Lerner, Josh , “The Empirical Impact of Intellectual Property Rights on Innovation: Puzzles and Clues”, The American Economic Review P&P, 99 (2): 343-348
Shapiro, Carl , “Patent Reform: Aligning Reward and Contribution” NBER Working Paper No. 13141.
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