Pethokoukis, Economics, Regulation

Why one-size-fits-all patent law is a bad idea

Credit: VoxEU

Credit: VoxEU

Alex Tabarrok has argued that patent law should be stronger in business sectors where there are high “innovation-to-imitation costs” such as pharmaceuticals and weaker where costs are lower, such as software. Tabarrok:

So, pharmaceuticals are really the classic case of where the innovation-to-imitation costs are extraordinarily high. It costs about a billion dollars to create a new pharmaceutical. The first pill costs a billion dollars; the second pill costs 50 cents. So, that’s a classic case where imitation costs really are low. That’s the best case for patents, in a field like that.

But my question is: Why does every innovation deserve or require the same 20-year patent? Why do we have a system which gives a one billion dollar pharmaceutical–where there’s $1 billion in research and development costs–we give that a 20-year patent and one-click shopping gets the same 20-year patent? That makes no sense whatsoever.

So, what I suggest is a more flexible system. I’d like to have a 20-year patent, maybe a 15-year patent, maybe a 3-year patent. Something like that. And then we could say: You want to apply for a 3-year patent? We are going to get this through the system quickly; we won’t look at it so much. Hurdle to make the case for it smaller. Exactly. You want a 20-year patent, though: You’d better show us that you really are deserving and put some costs in there.

This seems to make a lot of intuitive sense. The new study Do patent rights impede follow-on innovation? by Alberto Galasso and Mark Schankerman tends to more or less support Tabarrok’s general approach:

We find that the loss of patent protection leads to about a 50% increase in subsequent citations to the focal patent, on average. This evidence shows that, at least on average, patents block cumulative innovation. … We also find that the impact of patent invalidation on subsequent innovation is highly heterogeneous. There is substantial variation across broad technology areas. As illustrated by the figure below, patent invalidation has a large and statistically significant impact on cumulative innovation in the fields of computers and communications, electronics, and medical instruments (including biotechnology). However, we find only a small and statistically insignificant effect in the chemical, pharmaceutical, or mechanical technology field.

The researchers add that the impact of patent invalidation is strongest for fields characterized by two features: “complex technology (where new products rely on numerous patentable elements) and high fragmentation of patent ownership among diverse firms.” So when you get rid of IT patents, lots more innovation follows. Pharma? Not so much. Given that, more efficient licensing and a targeted scaling back of patent rights would be more appropriate than a broad-based scaling back of rights.

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