The Volokh Conspiracy - Patent Reform Redux:

This morning's post on patent reform inspired dozens of responses. Among those responses, a few points were raised often enough that I think I should clarify them.

First, contrary to the assertions of several posters, we really do get a better social bargain when we fork over a million dollars in tax money instead of a million dollars in monopoly profit. Here's why: When drugs are cheaper, more people use them, and that's a boon. Here is a numerical example, in case you like that kind of thing.

For what it's worth, this point is standard fare in any Principles of Economics course. One of my most-used exam questions is True or False (and explain why): If the customers of a monopolist could bribe him to sell at a competitive price, both they and he would be better off. The answer is true, and students who want to pass the course had better be able to draw the diagram that proves it.

Next, some people worried that the Kremer proposal does nothing to alleviate some of the fundamental problems of the patent system---like the granting of patents for obvious innovations like double clicking. On the contrary---putting these patents in the public domain undoes a big part of the damage. Now everyone can double click no matter who initially got the patent.

Of course we haven't undone all the damage; we'll still have smart people wasting their time coming up with stupid inventions to patent. But the current system has exactly the same problem. In fact, quite a few of the objections raised to Kremer's proposal apply equal well to the current system, and are therefore no reason to prefer one over the other. For example, one poster complained that in the Kremer plan, the government would be the sole arbiter of patent grants. As opposed to what we have now?

A more cogent objection came from those who complained that we should not all be forced to share the costs of an invention that only some of us use. As a hardcore libertarian, I am sympathetic to the sentiment. But I also believe---though I cannot currently prove---that the system Kremer proposes would generate so much extra social value that almost everyone would eventually win. I'll subsidize your Lipitor; you subsidize my Rogaine, and we can both come out ahead.

Another cogent objection came from those who worry about inventors who have specifically devised a product they can use more effectively than anyone else. We don't want to yank that product away from them. The poster Byomtov made some excellent replies to this and other issues, but I'm willing here and now to modify the proposal as follows: First, the government offers to pay not the winning bid, but 1.25 times the winning bid; Kremer endorses this on the ground that an invention in the public domain has more social value than an invention in private hands. And second, if the inventor wants to turn down that offer and keep his invention, we'll let him.

That also solves the problem of inventors who feel shortchanged because the benefits of their inventions lie in the far future. If they'd rather hold onto their inventions and take the risk of distant success, that's fine. The downside of allowing this is more monopoly power, but the goal here was a drastic improvement, not perfection.

Finally: Several posters thought that in an auction with only a 50% chance of being consummated, investors will tend to either double or halve their bids. To clarify the issue, suppose you go down to the car dealer to buy a Lexus, for which you are willing to pay $30,000. But you've heard that there's a 50% chance the Lexus is out of stock. Which of the following is correct?

A) You are now willing to pay $60,000 for a Lexus.

B) You are now willing to pay $15,000 for a Lexus.

If your answer was "none of the above", you get an A. The application to patent reform is left as an exercise for the reader.

	[Steven Landsburg, guest-blogging, April 23, 2007 at 10:35pm] Trackbacks Patent Reform Redux: This morning's post on patent reform inspired dozens of responses. Among those responses, a few points were raised often enough that I think I should clarify them. First, contrary to the assertions of several posters, we really do get a better social bargain when we fork over a million dollars in tax money instead of a million dollars in monopoly profit. Here's why: When drugs are cheaper, more people use them, and that's a boon. Here is a numerical example, in case you like that kind of thing. For what it's worth, this point is standard fare in any Principles of Economics course. One of my most-used exam questions is True or False (and explain why): If the customers of a monopolist could bribe him to sell at a competitive price, both they and he would be better off. The answer is true, and students who want to pass the course had better be able to draw the diagram that proves it. Next, some people worried that the Kremer proposal does nothing to alleviate some of the fundamental problems of the patent system---like the granting of patents for obvious innovations like double clicking. On the contrary---putting these patents in the public domain undoes a big part of the damage. Now everyone can double click no matter who initially got the patent. Of course we haven't undone all the damage; we'll still have smart people wasting their time coming up with stupid inventions to patent. But the current system has exactly the same problem. In fact, quite a few of the objections raised to Kremer's proposal apply equal well to the current system, and are therefore no reason to prefer one over the other. For example, one poster complained that in the Kremer plan, the government would be the sole arbiter of patent grants. As opposed to what we have now? A more cogent objection came from those who complained that we should not all be forced to share the costs of an invention that only some of us use. As a hardcore libertarian, I am sympathetic to the sentiment. But I also believe---though I cannot currently prove---that the system Kremer proposes would generate so much extra social value that almost everyone would eventually win. I'll subsidize your Lipitor; you subsidize my Rogaine, and we can both come out ahead. Another cogent objection came from those who worry about inventors who have specifically devised a product they can use more effectively than anyone else. We don't want to yank that product away from them. The poster Byomtov made some excellent replies to this and other issues, but I'm willing here and now to modify the proposal as follows: First, the government offers to pay not the winning bid, but 1.25 times the winning bid; Kremer endorses this on the ground that an invention in the public domain has more social value than an invention in private hands. And second, if the inventor wants to turn down that offer and keep his invention, we'll let him. That also solves the problem of inventors who feel shortchanged because the benefits of their inventions lie in the far future. If they'd rather hold onto their inventions and take the risk of distant success, that's fine. The downside of allowing this is more monopoly power, but the goal here was a drastic improvement, not perfection. Finally: Several posters thought that in an auction with only a 50% chance of being consummated, investors will tend to either double or halve their bids. To clarify the issue, suppose you go down to the car dealer to buy a Lexus, for which you are willing to pay $30,000. But you've heard that there's a 50% chance the Lexus is out of stock. Which of the following is correct? A) You are now willing to pay $60,000 for a Lexus. B) You are now willing to pay $15,000 for a Lexus. If your answer was "none of the above", you get an A. The application to patent reform is left as an exercise for the reader.