Ban IP CP - Georgetown 2024

CP – Ban IP
Notes
For the purpose of starter pack I just wanted to facilitate innovation good/bad debates. There aren’t “aff answers” because the answer should be the aff. I purposefully did not include a bunch of external impacts but we can certainly make updating this a focus for one of the labs.
CP – Ban Patents
Abolish Patents CP – 1NC
The United States federal government should abolish intellectual property.
Patents obliterate innovation.
Boldrin ’12 [Michele and David Levine; September 2012; Ph.D. and Joseph Gibson Hoyt Distinguished Professor at the University of Washington, focusing on the theory and application of Dynamic General Equilibrium models; Ph.D. and John H. Biggs Distinguished Professor Emeritus at Washington University in St. Louis, studying intellectual property and endogenous growth in dynamic general equilibrium models; Federal Reserve Bank of St. Louis, “The Case Against Patents,” Working Paper 2012-035A, https://research.stlouisfed.org/wp/more/2012-035]
1. Introduction
The case against patents can be summarized briefly: there is no empirical evidence that they serve to increase innovation and productivity, unless the latter is identified with the number of patents awarded – which, as evidence shows, has no correlation with measured productivity. This is at the root of the “patent puzzle”: in spite of the enormeous increase in the number of patents and in the strength of their legal protection we have neither seen a dramatic acceleration in the rate of technological progress nor a major increase in the levels of R&D expenditure – in addition to the discussion in this paper, see Lerner [2009] and literature therein. As we shall see, there is strong evidence, instead, that patents have many negative consequences. Both of these observations, the evidence in support of which has grown steadily over time, are consistent with theories of innovation that emphasize competition and first-mover advantage as the main drivers of innovation and directly contradict “Schumpeterian” theories postulating that government granted monopolies are crucial in order to provide incentives for innovation. The differing predictive and explanatory powers of the two alternative classes of models persist when attention is shifted to the historical evidence on the life-cycle of industries. The initial eruption of small and large innovations leading to the creation of a new industry – from chemicals to cars, from radio and TV to personal computers and investment banking – is seldom, if ever, born out of patent protection and is, instead, the fruits of highly competitive-cooperative environments. It is only after the initial stages of explosive innovation and rampant growth end that mature industries turn toward the legal protection of patents, usually because their internal grow potential diminishes and the industry structure become concentrated.
A closer look at the historical and international evidence suggests that while weak patent systems may mildly increase innovation with limited side-effects, strong patent systems retard [decrease] innovation with many negative side-effects. Both theoretically and empirically, the political economy of government operated patent systems indicates that weak legislation will generally evolve into a strong protection and that the political demand for stronger patent protection comes from old and stagnant industries and firms, not from new and innovative ones. Hence the best solution is to abolish patents entirely through strong constitutional measures and to find other legislative instruments, less open to lobbying and rent-seeking, to foster innovation whenever there is clear evidence that laissez-faire under-supplies it.
2. Theory and Practice of Patents and Innovation
There is little doubt that providing a monopoly as a reward for innovation increases the incentive to innovate. There is equally little doubt that granting a monopoly for any reason has the many ill-consequences we associate with monopoly power – the most important and overlooked of which is the strong incentive of a government granted monopolist to engage in further political rent-seeking to preserve and expand his monopoly or, for those who do not yet have it, to try obtaining one. Said differently: while the positive impact of patents is the straightforward partial equilibrium effect of increasing to the monopolistic level the profits of the successful innovator, the negative one is the subtler general equilibrium effect of reducing everybody else’s ability to compete while increasing for everyone the incentive to wastefully lobby.
In the long run, though, even the positive partial equilibrium effect may be more apparent than real: the existence of a large number of monopolies due to past patent grants reduces the incentives for innovation as current innovators are subject to constant legal action and licensing demands from earlier patent holders. The recent – and largely successful – efforts of Microsoft to impose a licensing fee on the large and expanding Android phone market is but one case in point. With the exception of Motorola Mobility all the handset manufactors have agreed to the fee, and Motorola has recently lost the first battle – fought not in court but in the more receptive domain of the U.S. International Trade Commission.1
The basic problem with the patent system – the downstream-blocking effect of existing monopoly grants on future innovation – is greatly increased because modern products are made up of so many different components. The Microsoft-Motorola example is a good illustration as a licensing fee on Android mobile phones is being charged by Microsoft soley over a patent involving the scheduling of meetings – a trivial and rarely used feature of modern smart-phones. This is but one of many thousands of patented “ideas” used in a modern smart-phone, and each owner of each patent potentially can charge a licensing fee. Hence, the main dynamic general equilibrium effect of a patent system is to subject future inventions to a gigantic hold-up problem: with many licenses to be purchased and uncertainty about the ultimate value of the new innovation each patent holder, in raising the price of his “component”, imposes an externality on other patent holders and so charges a higher than efficient licensing fee. Boldrin and Levine [2005] and Llanes and Trento [2009] have explored the theory, many case-studies involving patents – and other fractionated ownership problems – can be found in Heller [2008]..
A second widely cited benefit of patent systems – although not so much in the economics literature – is the notion that patents are a substitute for socially costly trade secrecy and improve communication about ideas. From a theoretical point of view the notion that patents are a substitute for trade secrecy fails even in the simplest model. If a secret can be kept for N years and a patent lasts M years then an innovator will patent exactly when N ≤ M. Hence, only those things will be patented for which the secret would have emerged before the patent expired, while those for which the secret can be kept will not be patented. The same remains true in more complex and realistic models such as that of Boldrin and Levine [2004], see also Ponce [2007]. It is also the case that modern “disclosure” in patents is negligible – it is essentially impossible to build a functioning device or software program from a modern patent application, a fact which is especially clear since some patented ideas do not – and cannot – work. A case in point is the patent for moving information through the fifth dimension.2
A more subtle point is that secrecy may bias the type of inventive activity away from innovations that are not easily kept secret to those that can be, vice versa for patents. There is historical evidence from Moser [2004, 2005] in this direction. In 19th Century expositions of inventions, while countries without patent systems had overall rates of innovation similar to those with a patent system, they did specialize in innovations which were more easily kept secret. How strong this bias would be if no countries had patent systems – that is, whether it is true that patents encourage innovations that would not otherwise be made, or if they just shift the location of innovation from country to country – is not known.
The related idea that patents somehow improve communication about ideas – a notion key to the “public-private” partnership between governments and private research organization in which the government funds the research and then gives the private organization a monopoly over anything developed in the course of research – is backed neither by theory or evidence. It is impossible to study the history of innovation without recognizing that inventors and innovators exchange ideas as a matter of course and that secrecy occurs, in those cases in which it occurs, only in the final stages of an innovation process, when some ambitious inventors hope to corner the market for a functioning device by patenting it. A good case in point is that of the Wright brothers, who made a modest improvement in existing flight technology which they kept secret until they could lock it down on patents, then used their patents both to monopolize the U.S. market and to prevent innovation for nearly 20 years. This is discussed in Shulman [2003]. The role that Marconi and his patent played in the development of the radio is altogether similar – see Hong [2001] – as are innumerable others. At the opposite extreme we have, again among many, the example of the Cornish steam engine discussed in Nuvolari [2004a, b]. Here engineers exchanged nonpatented ideas for decades in a collaborative effort to improve efficiency. The modern and highly successful open source software movement is a more contemporary example of how collaboration and exchange of ideas thrives absent intellectual property. How much public benefit of the various patented – and never-the-less secret – pieces of the Microsoft operating system has occurred?
On the other side of the coin, the rationale for patent systems is weak. In most industries the first mover advantage and the competitive rents it induces are substantial without patents. Again: the smartphone industry – laden as it is with patent litigation – is a case in point.3 Apple derived enormous profits in this market before it faced any substantial competition. The first iPhone was released on June 29, 2007. The first serious competitior, the HTC Dream (using the Android operating system) was released only on October 22, 2008. By that time over 5 million iPhones had been sold, and sales soared to over 25 million units during the subsequent year, while total sales of all Android based phones was less than 7 million. In the tablet market the iPad still has no serious competitor despite having been introduced on April 10, 2010. While it is hard to prove this delayed imitation would have occurred also in the complete absence of patents, it is a fact that Apple did not try to use patents to prevent the Android phones from coming into its market and the subsequent “patents’ fight” has been taking place largely after 2010, something that the Boldrin and Levine [2004] model predicts. More to the point, companies typically instruct their engineers developing products to avoid studying existing patents so as to be spared subsequent claims of willful infringement, which raises the possibility of having to pay triple damages. Based on sworn testimony by Google’s chief of Android development in Oracle vs. Google (see for example Niccolai [2012]) the engineers that developed Android were unaware of Apple (or other) patents, and so were unlikely to have been helped by them.4
How valuable financially, for Apple, was the delay in the Android phones entry? Based largely on the fact that Apple has kept its first mover advantage in spite of a large imitative entry in this market, the value of Apple stock – during a severe market downturn – has gone up by a factor of approximately five. While there may have been some delay in competition due to Apple’s threat – since executed – of patent litigation, the fact is that similar but less successful devices had been available for a number of years before Apple finally cracked the market.
The market for software and hardware may be viewed as a somewhat special case. Generally the fixed cost of producing software is low – although it is estimated that Apple spent 150 million USD developing the iPhone. This, however, pales in comparison to the cost of developing new medicines – which is estimated to have a present value of closer to 1 billion USD – the same way it does in front of that for developing a new model of automobile, which is in the same range. Interestingly it is also true that – according to both survey and anecdotal evidence – patents play an important role in encouraging innovation in the pharmaceutical industry while playing a minor one in that of cars, insofar as new components and even plants are often developed by consortia or joint-ventures of otherwise fiercely competitive producers marketing different automobile’s brands. The relevance of patents in the pharmaceutical industry – then, and contrary to “Schumpeterian” theories – is most likely not due to the high fixed costs but rather the fact that disclosure in the case of drugs is more meaningful than in that of cars and most other products. The chemical formula and the efficacy of the cure as established by clinical trials are available to competitors essentially for free and it is the second (a public good, privately produced due to a political choice) that accounts for about 80% of the initial fixed cost. On the other side, the downstream cost of monopoly pricing of pharmaceutical products is much higher for life-saving drugs, and the cost of monopoly pricing of other pharmaceutical products is also quite high. Hence various economists, holding differring views about intellectual property, have nevertheless argued that if government intervention is indeed needed in this market a system of prizes would be far superior to the existing system of monopolies.
To understand patents in practice – and in particular why the poorly named “Schumpeterian” theories are not relevant to a proper understanding of either their effect upon, or the determinants of, innovative activity – it is necessary to examine the lifecycle of industries (see for example Jovanovich and McDonald [1994] and Scherer [1990]). Typically a new, hence innovative, industry begins with a competitive burst of entries through which very many innovators try hard to get their products to market. In these early stages, there are many firms bringing different versions of the new product to the market – just think at the American auto industry in the early twentieth century or the software industry in the 1980s and 1990s – demand for the new product grows rapidly and the latter is also rapidly improved. The price elasticity of demand is consequently high: what is important is not to dominate the market but rather try to get your own products quickly to it and to reduce costs. What this means is that your cost-reducing innovation is good for me in the same way that my cost-reducing innovation is good for you, hence let us all imitate each other and compete in the market. As the industry matures, demand stabilizes and becomes much less elastic; the scope for cost-reducing innovations decreases, the benefits of monopoly power grow and the potential for additional product innovation also shrinks. Typically there is a “shake-out” in which many firms either leave the industry or are bought out. The automobile industry is a classical historical example but the much more recent “bursting” of the dotcom “bubble” is, in fact, one we may recall better and that makes this point even more forcefully. At this stage rent-seeking does become important and patents are widely used to inhibit innovation, prevent entry, and encourage exit. If we look at patent litigation in practice – as is predicted by theories such as that of Boldrin and Levine [2004] – it takes place when innovation is low. The dead hand of dying institutions – Texas Instruments was famous for this and now we have the example of Microsoft – gets hold of the industry as they attempt to tax consumers, new entrants and any potential competitor. Far from being encouraged, when an industry matures innovation is blocked by the ever increasing appeal to intellectual property protection on part of the insiders.
It is somewhat conventional to think of welfare losses from distortions as small – the well known arguments about the small cost of the business cycle and of the general idea that welfare triangles due to monopoly power are small, being paradigmatic cases in point. With the monopolies of patents the opposite is the case. The conventional view starts with competitive equilibrium and observes that welfare losses from small price variations are quadratic as a function of the price, hence grow very slowly as the price increases. In the case of full monopoly – as is the case with patents – we are not interested in small price deviations from competition but rather we are interested in pricing near the top of the profit function. Witness for example the fact that patented pharmaceutical products often sell for hundreds of times the marginal cost of production as some astonishing pricing differences between the US and the European markets show. Here social loss increases nearly linearly with prices, while the deviation of profits from the maximum are quadratic. Hence small price increases have a only a small effect on profits – although still worthwhile from the perspective of the monopolist – with substantial social loss. It is impossible to observe the behavior of modern IP monopolists without recalling this theoretical prediction. Most of the copyright wars revolve around measure to prevent piracy, empirically a relatively minor factor as far as profits of media corporations are concerned (see for example Sinha, Machado, Sellman [2010], Danaher, Dhanasobhon, Smith and Rahul, [2010], Sanchez [2012]). In the case of patents, and particularly pharmaceutical patents, the situation is even more severe. We have made mention of the loss of human life due to the pricing of AIDS drugs. More revealing is the empirical study of the Quinolones family of drugs (Chaudhuri, et al. [2006]). It measures the economic consequences to India of the introduction of pharmaceutical patents for this family of drugs and concludes that the consequence to third world India will be nearly 300 million USD in welfare losses – while the gain to the first world pharmaceutical companies will be less than 20 million USD.
The cost of litigating patents is not insubstantial either. Bessen and Meurer [2009] used stock market event studies to estimate the cost of patent litigation: they estimate that during the 1990s it rose substantially until at the end of the period it constitutes nearly 14% of total R&D costs. A related but more difficult to quantify phenomenon is the rise of uncertainty caused by the legal system. A case in point are the NTP Inc. patents that were used to threaten the Blackberry network with a shutdown. In 2006, posed on the edge of a cliff, Research in Motion, the producer of Blackberry, agreed to pay $ 612.5 million to license the patent in question from NTP. The patent was later invalidated by the court – but Blackberry of course did not get their money back. Further details about this and other NTP-induced cases are available on the Wikipedia’s page about NTP. Here the bad behavior of a single judge cost Blackberry more than half a billion dollars. In this setting it is no surprise that patent trolls hope to get rich quickly.
Arms Races and Patent Trolls
Patenting has exploded over the last decades. In 1983 in the U.S. 59,715 pat

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