Effects of revocation of patent protection

"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. "

US Patent and Trademark Office
US Patent and Trademark Office

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.

Unprotected markets

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.

0 comments

  1. I forgot - comparing patent protection of inventions and human rights, so in my opinion it's really a bit exaggerated, don't be angry, it's just my opinion, I often come across ad absurdum argumentation to explain the various effects and consequences, but this is up to me too much…

  2. I am glad that Europe is so advanced that it has protected intellectual property since the 17th century. Well, today we all applaud the English kings and queens for introducing patent protection. Do you know how the first patents came about? The manufacturer bought a license from the monarch and then no one else could produce the same thing (or provide the service). And isn't China's great development and economic growth just the proof (as opposed to the modest growth or stagnation of European economies) that the lack of patents is the key to success? I don't want to overdo anyone like previous posts, I'm just trying to give me a little thought.

  3. It is interesting how such a not very intelligent reasoning can look like the bold opinion of an unorthodox expert. I can't help but feel that the article gives me the general impression that its author has a personal problem with originality, ideas or innovative, unorthodox thinking. Let those who have some ideas do not think that they are just theirs, and instead unpack them pretty quickly and do not hinder economic prosperity! Although I am no expert on patents and therefore not on research and not even on economics, I still understand the meaning, significance and importance of patent protection in society at our civilizational level. Like copyright, patent protection is based on a social consensus that there is a right to intellectual property, in addition to the right to tangible property, and both are among the basic human rights. This is not primarily about economic prosperity, although it is also related to human rights (especially in the longer term), but about cultural and civilizational conveniences, such as the inviolability of property. Like patents, it could be argued, for example, to protect the rights of a composer, so as not to prevent other musicians from adopting other people's ideas and developing them in different ways, so that culture acquires breadth and variety. The author's idea that each company should permanently keep its ideas from the competition instead of patenting on its own, sounds similar to the idea of ​​abolishing the police, because everyone should take care of themselves so that someone else does not steal it. After all, each of us would like to prosper, so why wouldn't the poor take some of the wealth of the rich? And to whom it does not suit, let him defend himself. Maybe a bit of an exaggerated example, but I think the author of the article is not too far behind in the absurdity of his arguments - I find it particularly strange to think that an innovative company should protect itself against stealing an idea by having it potentially sell or license thieves 🙂 Of course, it is possible to discuss (and there is also a wide debate in the world) what everything should be possible to patent. In general, however, let us be happy to live in a relatively developed part of the world, where nations and states value the intellectual property of individuals and communities so much that they have imprinted its protection on laws and even international law. On the other side of the barricade, where the reasoning author might want to go, are states like China, where they do not pay much attention to the protection of intellectual property, just as they do not mind the flagrant trampling of other human rights. But the economy is developing rapidly, which is certainly helped in this extensive phase by the impunity of theft and use of foreign intellectual property.

  4. I agree with Michal. By the way, Intel's race with AMD, a stealer of Intel technology at the time, is a real inspiration, nicely demonstrating the falsity of patent claims - when Intel renamed the 80586 "Pentium" and began using patents properly, AMD had to go its own way, and development worked.
    There is a very minimal number of cases where someone happens to develop the same product as the competition. However, there are an enormous number of cases where great competition would completely destroy a small inventor without patent law. For example, one of my acquaintances after the revolution calculated and designed a lamp for the treatment of bilirubin with better parameters than Siemens, Phillips or someone else. What do you think would happen if he didn't have a utility model for her? Well, of course, the construction would be stolen by a German giant and the inventor would end up in a labor. Ideal condition, right?
    The author of the article severely underestimates the cost of copying - these are, especially in pharmaceuticals or electrical engineering, completely marginal compared to the cost of development.
    Otherwise, an excellent (and sometimes quite heated) discussion on this topic took place at DF: http://www.dfens-cz.com/komentare.php?akce=fullview&cisloclanku=2010121203&lstkom=320061#kom320061 and further )

  5. Hello

    I see you still don't understand.

    1) Before the revolution, research was done at Tesla in Rožnov pod Radhoštěm in the field of integrated circuits by obtaining components from the west, grinding the case and copying it normally. => If you can't protect against copying or integrated circuits, how do you protect anything else?
    2) Patent protection is theoretically unfair to those who are others, but the conditions are the SAME for all. It's exactly the same as in sports, only the first one wins there as well, and do you feel bad too? Besides, just because someone's going to be second doesn't necessarily mean they're going to lose. It can solve the problem in another and maybe even better way, then the free market will decide for itself which solution is better. Direct and alternating current can serve very nicely as an example. DC had been here before, promoted mainly by Edison, then Tesla came up with AC. Both ways of distributing electricity solve the same problem, but each one differently and the other is much better in terms of efficiency, so he won, even though Tesla came up with it later. Today, you can buy any product from different manufacturers, cars all do the same activity, yet you can choose from x manufacturers, which I would say that quite decently refutes the whole part of your part called "Patent protection affects the behavior of companies". Especially because of the sentence "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." Please take a look and try to see how the prices of all products move over time and what is the reason for their movement (here it would be worthwhile to deal with cartels, which may more easily keep the price of products at the same value). As you describe in the last paragraph, IBM is working very well these days, because it is the best in the field of semiconductor technology development (even Intel does not have time to match them). The irony is that IBM has developed technology for about 5 (maybe more) years ahead and still sells the worse one. Neither they nor their customers want new technologies so quickly, because they do not have time to reimburse the costs of technologies that they have already purchased, or have not yet used for new ones.

    In conclusion, I would recommend that you think of everything you are pushing for if you are involved in politics and therefore want to influence what is happening, so that your activities do not do more harm than good. Many of the pastimes approved by our current and past politicians had a good intention at the beginning, but someone would deserve a facane for the implementation and the final result, and the same can easily happen to you. No one is able to come up with all the possible variants of further development that will occur after his intervention in the current state, not even you.

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