"In a state that allows patent protection, the newly developed product is provided only by the company that invented it. It has guaranteed the entire demand on the market of the product and has no competition. However, this company is limited by its distribution capabilities, so its product does not reach the maximum potential number of customers, as if this product were offered by more companies. "
What is patent protection in economics?
From an economic point of view, patents are a state-protected monopoly in a particular emerging market. The first company to enter this market has the opportunity to pay the state to create a barrier for other companies to enter this market. A product market becomes a market when demand for a product arises. In a normal unprotected market, the share of demand for one company gradually decreases with each new competing company that offers that product. As a result, patent protection means that the state fixes the demand for the protected product, ie that the first company does not share the total demand with anyone. The state thus fixes the company's economic profit - the profit from the fact that it has no competition and, above all, that it is not threatened by any competition. However, patents are not characteristic of all markets. They only concern product markets, the costs of which are largely fixed costs. A typical example of a fixed cost is research. That is why we often encounter patents for products whose significant part of the cost is the price of research (fixed) and only a small component of the cost is the cost of production itself (variable) - for example, medicines.
From the description so far, patent protection of markets with a high proportion of fixed costs might seem logical to us. The cost of creating a product is enormous and the company "deserves" an economic profit to recoup its research costs quickly. However, there are markets that have high fixed costs, yet are not protected by the state and offer their products without any problems - in short, they can do without monopoly protection. Network industries are a typical example. Although their market is not demanding on research, it is on a different fixed cost, and that is to build a network. However, the state does not give these companies any privileges. The state does not create a barrier for the entry of a new company providing, for example, cable television, yet the original company operates in the field without any problems and, despite the huge fixed costs, is expanding its services.
Mobile operators are a bit of an exception. Although the state does not give any single operator a patent for mobile communication, it strictly limits the number of licenses in our market - which is a kind of parallel to patent protection. Thus, there is competition in such a market, but not completely open. On the other hand, the European Union regulates the same market, for example by dictating roaming prices. It could be said that the state behaves schizophrenically when, on the one hand, it does not allow open competition and thus increases the economic profit of operators. On the other hand, it reduces their profits by limiting the prices of calls from abroad.
Why do patents only exist somewhere?
When we have shown that there are markets with a large share of fixed costs unprotected and others protected by patent protection, the question arises, how do those protected by patent protection differ? For network industries, there is no risk of competition with significantly lower fixed costs than the first company on the market. In practice, this means that the first company had to build a network for a large sum of money. However, any potential competitor would have to build its own new network. The fixed costs of the two competitors would not differ much. In the case of companies that have high fixed costs caused by expensive research, the situation is a little different. The first company to enter the market has high fixed costs because it has to fund research. However, every other company on the market, if not protected by patents, has lower fixed costs - it does not have to finance research, only the cost of "looking" at the research of the first company. It is therefore in a more advantageous position than the first company. The state makes this difference when it provides patent protection. It seeks to provide the advantage of economic gain to those who have higher fixed costs because they have funded research.
Patent protection is often advocated for its effect of reducing the risk of invention - those who invest dizzying sums in an invention have a monopoly on the product thanks to patent protection, making invention risk-free. However, if it is not alone and a similar product is being developed by several companies or inventors, then patent protection sharply increases the risk of such an invention. Only the first inventor will get the monopoly, and everyone else has invested their money in vain. What's more, patent protection demotivates the further development and improvement of already invented products. If someone invents a better or cheaper way of production, invents how to improve the product, move it technologically higher, they can not apply such an idea, because the original product is already patented. The owner of the patent license himself is not pushed into further development because he has no competition.
Patent protection influences the behavior of companies
In a state that allows patent protection, a newly developed product is provided only by the company that invented it. It has guaranteed the entire demand on the market of the product and has no competition. However, this company is limited by its distribution capabilities, so its product does not reach the maximum potential number of customers, as if this product were offered by more companies. Fixed research costs are thus divided among a smaller number of customers and the product is logically more expensive. Due to the lack of positive effects of competition, there is no pressure to reduce variable costs, so the price of the product does not fall much over time. By not increasing efficiency manufacturing, the consumer also suffers.
Revocation of patent protection
In the absence of patent protection, companies would have to behave differently to avoid competition from companies not burdened by development costs. One of the possibilities is to increase the costs of the competition to copy the idea, for example, by the fact that the company will better guard the secrets of product production or otherwise complicate its discovery.
Another possible way is to sell the materials of the invention to competing companies before they are launched on the market. These competitors would be willing to pay for it an amount equal to their fixed costs of "looking at" the invention, but also part of their share of the economic profit. Even after the product is launched, it will still be possible to sell the idea to other companies up to the cost of copying the invention. After all, it is better to buy the secret of production cheaper than to expose it more expensive. This could lead to a change in the structure of the market to a situation where companies specialize in research and others in the sale of research products. When more companies provide the same product, the fixed research costs are spread over more customers, reducing the price of the product. Companies will continue to compete in this market and thus reduce other costs. Again, the consequence will be positive. The absence of patent protection would thus result in a lower price for the products and their wider availability.
The article was originally published on Let it do.