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Are Intellectual Property Rights Detrimental to Innovation?

2009; Taylor & Francis; Volume: 16; Issue: 3 Linguagem: Inglês

10.1080/13571510903227007

1466-1829

Claude Crampes, Corinne Langinier,

Pharmaceutical Economics and Policy

Abstract Intellectual property rights are legal constraints that limit conditions of entry in industries where incumbents are innovators. The set of legal constraints is the same for all industries, and there is no consideration of the possibility that the externalities created by entry in a given industry may not necessarily be negative for the incumbent, or that the incumbent's R&D expenditures might actually be detrimental to new entrants. We show that one unique set of legal rules can foster innovation in some industries and be detrimental in others. Our model is illustrated by case studies from the Information and Communication Technologies industry. Key Words: InnovationSpilloverLeadershipIntellectual Property RightsJEL classifications: K4L11O31 Notes 1. The ‘cumulativeness’ of innovations has been analyzed in Scotchmer (Citation1991). Or take the following well‐known passage, commonly attributed to twelfth‐century philosopher Bernard de Chartres: ‘We are like dwarfs on the shoulders of giants so that we can see more than they, and things at a greater distance, not by virtue of any sharpness of sight on our part, or any physical distinction, but because we are carried high and raised up by their giant size.’ The fact that this passage has been copied by many scientists is in itself proof of the concept. 2. O'Donoghue et al. (Citation1998) study a dynamic game where improvements arise randomly. They show that, if the protection against imitation is perfect, whereas the protection against improvement is not, innovators tend to overinvest or underinvest in R&D depending on the rate at which ideas occur to them. If ideas are too frequent, innovators cannot fully benefit from their innovations and, thus, tend to underinvest. On the other hand, if ideas are too infrequent, firms tend to overinvest. 3. In Scotchmer and Green (Citation1990), it is argued that a ‘strong’ novelty requirement that limits the number of patentable improvements can be socially better than a ‘weak’ novelty requirement, because it gives greater incentives to racing, and a race accelerates progress. 4. More commonly, incumbents face several followers. Our simplified setting does not account for this possibility; however, we do know that legal entry by a single follower leads to a duopoly situation in which the incumbent's benefit is lowered, whereas the introduction of several followers would lead to an oligopoly with lower and lower benefits. Consequently, with several entrants the results would be quantitatively different but qualitatively similar. 5. This was first studied by Gallini (Citation1992), who determined the appropriate protection against imitation, as well as the optimal patent duration in order to prevent imitation. 6. See De Bondt (Citation1996) for a description of spillovers. 7. See Amir (Citation2000) for an extensive comparison of the models of d'Aspremont and Jacquemin (Citation1988) and of Kamien et al. (Citation1992). 8. See, for instance, Bechtold (Citation2004). 9. Solving equations (Equation3) and (Equation4) gives the same result as solving the system of equations (Equation3) and (Equation7). We use the latter method, which has the advantage of allowing a direct graphical comparison of the investment levels both when the game is sequential and when it is simultaneous. The same kind of algebraic procedure can be used to solve the Stackelberg equilibrium, where a leader and a follower compete in quantities to sell a homogenous product. 10. Amir et al. (Citation2003) have shown that the equilibrium R&D level decreases in the spillover parameter. However, in their model, the parameter is defined at the production stage, as information sharing to decrease costs, while in our model, the spillover parameters are shortcuts for all interactions between the two firms at all stages. 11. Varian (Citation2005) has proposed a review on the economics of copying and copyright in the digital world. 12. See www.afternapster.com. On Napster, see Boldrin and Levine (Citation2002). 13. The idea that the four Microsoft products are technically better than their predecessors is developed in Leibowitz and Margolis (Citation2001). Some authors challenge this idea and consider that Microsoft won the battle with its marketing policy (mainly forced bundling), rather than on technical grounds; see Gilbert and Katz (Citation2001). 14. This is because xI (xE ) is an increasing function. The reader can easily draw the graph of xI ( x ) corresponding to Figure 4, as we did in Figure 2 in relation to Figure 1. 15. This means that an OS producer should not be allowed to prevent the use of its OS for the development of applications. The difficulty arises from the fact that OS producers can also be developers of applications. 16. Concerning the study of standards, as well as the competition between Nintendo and Sega, see Shapiro and Varian (Citation1999). The same story can be told about the more recent feud between Nintendo's Wii, Sony's Playstation 3 and Microsoft's Xbox 360; on this, see The Economist, 18 April 2009. 17. W3C also developed the HTML (Hypertext Mark‐up Language) standard used to design Web pages. 18. ‘Sony, the world's largest consumer‐electronics maker is under constant assault from a host of new competitors, with Samsung leading the pack. The one clear advantage Sony has had is its strong brand image, which is still the global electronics brand to beat. But now, that edge is being blunted. […]. Samsung has quickly gained technical prowess and is learning the Sony‐pioneered art of turning gadgets into fashion accessories. Now it is building a brand. In 2002, Samsung has spent more than $900 million world‐wide on branding activities such as television ads and retail promotions, compared with $700 million last year.’ Sony must now ‘introduce new products first in markets where Samsung is strongest,’ says Sony President Kunitake Ando. ‘They've learned so much from us. … Now they're becoming a much bigger influence on our strategy’ (Wall Street Journal Europe, 20–22 December 2002). 19. Additionally, Comcast has a foot in the content business through the QVC home shopping channel, its Hello!‐style entertainment channel, E! and the Golf Channel. Its latest project is G4, a channel for video games. With its enlarged customer base, Comcast will become a powerful partner for those looking to launch new services. ‘The beauty of having 21.5m customers is for ourselves or other companies or entrepreneurs to enable their business plans,’ Mr. Robert (Comcast's president) says (The Financial Times, 20 December 2002).