Information barriers to prizes apply equally to IPR, but prizes avoid patent-specific down-streaming barriers

We did not discuss the issue of subsequent innovations, that is, improvements to innovations or new innovations depending on past ones. In this regard, two points are of interest. First, under the intellectual property rights system, subsequent innovations may be stymied by the refusal of holders of property rights to allow improvements; there may be breakdowns in bargaining between the holders and innovators due to asymmetry of information.41 A famous example of this occurred when James Watt, holder of an early steam engine patent, denied licenses to improve it to Jonathan Hornblower and Richard Trevithick, who had to wait for Watt’s patent to expire in 1800 before they could develop their high-pressure engine.42 Under a reward system, this would not have been the case, for Watt’s steam engine would have been in the public domain, and Hornblower and Trevithick would have been free to improve it immediately. (Indeed, as noted in Section I, this was one of the arguments in favor of the reward system emphasized in the nineteenth-century debates.)43 The second point of note is that the government’s problem of determining rewards is made more difficult when the value of an innovation is in part that it leads to subsequent innovations. However, the government’s problem in administering the patent system is also made more difficult by the possibility of subsequent innovations (notably, in determining issues of patent scope—which subsequent innovations will be considered infringing) and for closely related informational reasons. Hence, it is not clear the extent to which, or whether, the added informational difficulty presented by subsequent innovations favors patent over reward.