A prize system is more likely to promote innovation by discouraging monopoly power

One alternative to the patent system is called the prize system. This entails giving a prize to whoever comes up with an innovation, or at least those innovations that meet announced objectives. For instance, the person who finds a cure or a vaccine for AIDS or for malaria would get a big prize. If a person comes up with a drug with slightly different side effects than existing drugs (but which is otherwise no more effective) he or she might get a small prize. In other words, the size of the prize would be calibrated by the magnitude of the contribution. This idea is actually an old one. The Royal Society of Arts and Technology have been advocating and even using prizes to incentivize the development of needed technologies for some two centuries. For instance, they thought it was important to come up with an alternative to chimney sweeps; small, underfed boys used to be sent down chimneys. It was not good for the health of these young boys and not a socially desirable way of cleaning chimneys; but not cleaning chimneys meant increasing the risk of fire, with serious consequences. Thus, the Royal Society offered a prize to anybody who invented a mechanical way of cleaning chimneys. The prize provided an incentive, and it worked. A patent system might also have motivated the development of a mechanical device (though it did not), but if it had, there might have been a problem. The owner of the patent might [*1720] have been tempted to attempt to maximize the return to his innovation by charging a high fee for its use. That might mean that only rich families could afford to use the mechanical device, and young boys' lives would have continued to be put at risk. There are a whole host of other things for which they have offered prizes. The current patent system is, of course, similar to a prize system, but it is a very inefficient one, because the "prize" is a grant of monopoly power, and with monopoly power there are incentives to restrict the use of the knowledge. One of the characteristics of a desirable innovation system is that the ideas and innovations, once developed, be widely used and disseminated, but the patent system is designed to restrict the use of knowledge. The alternative is to use the competitive market to ensure efficient dissemination; giving a license to a large number of people uses the force of competition to drive down the price and to increase the usage of the knowledge. In both cases, market forces are used: one is the incentive of a monopoly to restrict knowledge and raise prices, the other is the market force of competitive markets to drive down prices and extend the benefit of knowledge widely. Moreover, the prize system has the advantage that there is less incentive to waste money on advertising and to engage in other anticompetitive behaviors designed to enhance monopoly profits. I mentioned that the drug companies spend more on advertising and marketing than they do on research. These marketing expenditures are designed to reduce the elasticity of demand, which allows the owner of the patent to raise prices and increase monopoly profits. From a social point of view these expenditures are totally dissipative.