Patents cause deadweight loss from monopoly pricing

Despite the distinct benefits of the patent system, scholars have identified a number of problems with it. The principle concern--deadweight loss--results from one of its strengths, the right to exclusion. Exclusion creates artificial scarcity. 162 Deadweight loss results as competitors, who could drive down prices, are restricted by higher prices. 163 Such monopoly pricing opportunites create market distortions. 164 This renders the patent system inefficient because it results in reduced availability or production, resulting in artificially [*21] higher prices. 165 Economists typically consider this deadweight loss from monopoly pricing to exceed the costs of other incentive systems. 166 In some sectors--for example, pharmaceuticals--analysts have found that monopoly power spawns a number of detrimental effects, including high drug prices, inequitable allocation of medicines, and the creation of follow-on drugs with little additional value. 167

Several procedures are available to minimize deadweight loss. A form of price discrimination, two-part pricing, is

one such approach. In this system, a consumer pays an initial fee for the right to acquire units at no additional

charge or at a set price. 168Examples of this pricing scheme include Disneyland 169and Netflix or

Amazon Prime. 170Similarly, a patent pool typically requires members of the pool to pay a fee for free or

discounted access to the patents included in the pool. 171However, two-part pricing does not completely

solve the deadweight issue. 172The initial fee causes a deadweight loss of its own. For instance, the

Disneyland entrance fee will price some potential visitors out of the market. It does, however, allow those who do

pay admission to avoid the deadweight loss from monopoly pricing. 173

Another approach to address deadweight loss involves governmental efforts to reduce the effects of deadweight losses. The government could directly reduce deadweight by subsidizing purchases of the invention or its products, or indirectly reduce it by providing tax credits for such purchases. 174Alternatively, or in addition, the [*22] government could also impose price controls on these items. 175Of course, substantial price controls run the risk of reducing the patent system's primary incentive of monopoly pricing. Furthermore, these mechanisms minimize the effect of market forces as incentives for innovation. 176

The ability to exclude under the patent system also may discourage follow-on inventions. 177 Despite the

benefits of invention disclosure, empirical evidence nevertheless suggests that the patent system discourages

subsequent innovations. 178Economists have found that the restrictions of the patent system may impede

both follow-on research and subsequent innovations. 179