Patents increase consumer prices
Buccafusco, Christopher and Weinstein, Samuel N. (2024) - Christopher Buccafusco is the Edward & Ellen Schwarzman Distinguished Professor at Duke University School of Law. Samuel N. Weinstein is a Professor and Co-Director of the Heyman Center on Corporate Governance at the Benjamin N. Cardozo School of Law, Yeshiva University "Antisocial Innovation," Georgia Law Review: Vol. 58: No. 2, Article 4. Available at: https://digitalcommons.law.uga.edu/glr/vol58/iss2/4
When innovation scholars think about the means that governments use to encourage R&D, patents are probably the first tool that come to mind. The standard account of patents as innovation incentives is well known.78 Inventions are public goods that are both expensive to develop and difficult to prevent others from copying.79 Like other public goods, these features suggest that the market will not optimally supply desired inventions. If an innovator would have to spend a million dollars to develop an invention that could easily be copied by its rivals, the innovator simply won’t bother to invest its money in the first place. Patents solve the public goods problem by giving inventors exclusive rights to their inventions for a limited period of time.80 This period of exclusivity may enable inventors to charge supra-competitive prices for products that embody their inventions, thus allowing them to recoup their R&D costs and make a profit.81 Unlike some of the incentives described above, the government only issues patent rights to people who actually produce an invention. In order to obtain patents, inventors must demonstrate that they have generated something that is both novel and nonobvious to other skilled inventors.82 And, in theory at least, their inventions are required to be “useful.”83
Patents differ from prizes, grants, and tax incentives in another way. While the latter are paid directly by the government (and, thus, taxpayers) through spending, issuing patents doesn’t cost the government much.84 But patents definitely have a price. Patent incentives are financed by consumers of products that incorporate patents who must pay higher prices for those goods.85 By enabling patent owners to charge supracompetitive prices, patents act as a tax paid by consumers for the benefit of innovators.86 Thus, unlike other innovation expenditures, when governments promote innovation with the exclusive rights patents confer, their expenditures are “off-budget.”87 This means that it is enormously difficult to estimate the size of society’s contribution to innovation promotion through higher prices for patented goods.88