BOLDRIN IS WRONG – Models too simplistic and fail to account for commercial insentives and is too broad

2. WHY AGAINST INTELLECTUAL MONOPOLY IS AN UNFINISHED CASE Boldrin and Levine recognize that evaluating the comparative explanatory power of existing models of patents and innovation – including those that demonstrate net benefits from patents and those that emphasize the net costs – becomes a largely empirical question. They provide historical and contemporary examples of innovation in the absence of patents to illustrate that patents are not performing the innovation-increasing functions attributed by dominant theories, and they document situations in which patents appear to have increased costs and/or dampened innovation to show the potential negative effects of the patent system on innovation. They highlight the continuing lack of empirical evidence, despite decades of research, to demonstrate that the patent system has increased innovation, and reference empirical evidence pointing in the other direction. Their empirical case, which combines historical anecdotes with references to empirical studies and descriptions of current industry experiences, successfully illustrates the weakness of the traditional justifications for patents. But after reading their arguments we cannot help but wonder if the costs and benefits of the patent system articulated by Boldrin and Levine and supported by the body 1 The thought that NIE has a role to play in understanding patent law is not new, although existing work stops short of recommending the mainstream methodological change that I propose. Important contributions at the intersection of NIE and patents include, without limitation: Kieff (2006); Heald (2007); Merges (2000); Barnett (2008); Burk (2004); and Lemley (2004). Responding to “Against Intellectual Monopoly” / 1117 DOI: 10.2202/1555-5879.1431 of theoretical and empirical work they draw from have been adequately understood, captured, measured, and compared. Still missing is a deeper theorizing of the existing empirical data and the models underlying it to explain what the current data does and does not tell us about patents and innovation and a way of addressing the limitations of the existing literature through alternative modes of analysis. The book and the literature it surveys do not sufficiently explore how patents operate to shape human activities within the context of diverse processes of invention, innovation, technology transfer and commercialization. We are also left to wonder about the range of consequences, and in particular the costs, of the radical changes in the institutional environment, that Boldrin and Levine propose. In light of the unanswered critical questions about the mechanisms by which patents might influence innovation, Against Intellectual Monopoly (as well as the literature it surveys) fails to foreclose the possibility that patents may indeed play valuable roles in achieving innovation outcomes within our existing economic system – roles not readily replaced by alternative market and non-market solutions.

2.1. COMMON ROOTS OF THE DOMINANT APPROACHES TO PATENT LAW Modern patent scholarship provides a number of competing views of how patents impact innovation, the majority of which fall into one of two camps – those following Arrow’s original focus on the tradeoff between incentives and the cost of the monopoly power used to enhance incentives (the reward-based function of patents), and those following in the wake of Kitch’s prospect theory with its focus on the role of control as facilitating downstream investment and the coordination of activities needed in developing the invention (the prospect function of patents).2 Despite the diversity of views, the majority of approaches share common roots in a neoclassical economics foundation based on models of rational decision makers, decentralized private markets and competition. The common starting point for analysis is one that largely abstracts from the context of the innovation process and from the complexity of the institutional and organizational environment to isolate the tradeoffs between enhancing incentives (both directly and indirectly through control over downstream investments) and reducing competition. The most prevalent models of patents and innovation, built largely around a reward-based theory of patents, either involve or presume an inventor who is a rational decision maker and responds to the expectation of profit when deciding where to invest his or her effort, effort which is generally treated as fungible between alternative activities. Although the outcome of effort may be uncertain, the inventor can place an expected value on the returns available from alternative investments of effort (and other resources), and directs his or her effort to activities with the highest expected payoff. The fruits of this effort take the form of an invention that is often construed as an invention-product, although this can be expanded to include a claim over multiple inventionproducts or narrowed to include incremental improvements on existing invention-products) and evaluated in terms of potential market value. The focus of analysis typically centers on questions of whether monopoly is needed to solve an appropriability problem (and potentially a disclosure problem), whether at the point of invention (the reward-theory function) or in the subsequent path of development and commercialization (the prospect function) in a simplified and relatively homogenous market paradigm. While prospect-based theories seek to refocus on a broader market environment and the role that defining property rights over the invention plays in incentivizing commercialization, the underlying models of how patents impact innovation share many of the underlying assumptions of the reward-based theories and involve a similar level of abstraction from the nature and characteristics of different processes of discovery and innovation. Similarly, while the basic model has also been expanded to distinguish between the incentive effects of patents on initial inventions and on improvements or incremental inventions, the underlying models pay little attention to specific types of transactions and the specific features of markets and technology and human decision making which shape the innovation process (see Scotchmer, 1991). By abstracting from the institutional framework that governs market activities and structures competition, and by focusing on an abstract market for “inventions” and the role of patents as interventions in these markets, we are led to a view of the patent system as a departure from the broader competitive economy rather than as a part of it (see Liivak, 2009). Moreover, we are led to a study of the patent system that is largely isolated from, rather than embedded within, systems of innovation. The result is an approach to the study of patents and innovation that lacks explanatory power for many types of innovation processes and innovation outcomes. The limits of this underlying paradigm are most evident when applied to study innovation processes that fall outside of product-focused innovation by sellers intended for and motivated by reasonably predicable commercial market opportunities. Examples include open collaboration models and use innovation models of innovation.3 These models of innovation “contrast sharply with the seller innovator picture which dominates patent policy. In that picture, incentives for inventing, disclosing, and disseminating new technologies arise from the potential for recouping innovation investments through commercial sales” (Strandburg, 2008:471). These incentives are largely missing from certain models of collaborative discovery and development that have emerged, either around a shared project or through interest in modifying product or process use to suit user needs, calling into question the traditional roles (and justifications) for patents in facilitating innovation.