A reward system is preferable --- lowers the costs of pharmaceuticals, computer software, recorded music, and visual products while increasing the incentive to innovate --- patents don’t provide sufficient incentives

Importance of the Advantages of Reward Systems. To appreciate the [*545] possible advantages of reward systems, it is helpful to consider areas of innovation where the social losses due to intellectual property rights are likely to be high, namely, where the difference between price and production cost (after innovation) is large. Such areas of innovation may be exemplified by development of pharmaceuticals, computer software, and recorded music and visual products. Here, prices are often substantial in relation to production cost; drugs may sell for many times their marginal production cost, the price of computer software is generally nontrivial even though its marginal production cost is essentially zero (it can be downloaded from the Internet), and similar statements can be made about compact disc recordings, cable television broadcasts, and first-run movies. In a regime with rewards, drugs would be far cheaper and more widely used, all computer software would be free, and electronically recorded materials would be inexpensive, arguably engendering significant increases in consumer welfare. Moreover, there would also be potential gains from enhanced incentives to innovate, as profits from patent and copyright may fall considerably short of consumer surplus. For example, Kremer suggests that studies of the social versus the private returns from research indicate that private profits from research might well be only one-third of the social returns. Because optimal rewards would reflect the social returns, rewards would increase overall incentives to invest.

IV. CONCLUSION

Reward systems, or optional reward systems, and especially those based on sales-related information, appear on reflection to hold promise as alternatives to our system of intellectual property rights, because there is no necessity to marry the incentive to innovate to conferral of monopoly power in innovations. As such, serious study of the possibility of reward systems, with a view toward their implementation at least on an experimental, partial basis, is worth contemplating.