Nancy T. Gallini

The Economics of Patents: Lessons from Recent U.S. Patent Reform

U.S. patent reform over the past two decades has strengthened the legal enforcement of patent rights and has extended protection to new subject matter, such as genetically engineered life forms and business methods. This paper highlights these and other policy changes and the debate that this apparent increase in protection has sparked. While the case for stronger patents as a spur to innovation is a weak one, as revealed by recent theoretical and empirical research, evidence that they encourage disclosure and technology transfer is persuasive. The paper discusses the social costs and benefits of these effects from the policy changes and proposals for alleviating the costs through further patent reform.

Technology Transfer under Asymmetric Information

Licensing contracts for newly patented innovations are observed to vary along several dimensions, including the form and size of the payment to the inventor (fixed fee versus some output-based royalty), the degree of exclusivity, and the division of rents. In this article, we show that the form of the contract can be explained by two problems in technology exchange: the superiority of a licensors precontractual information about the economic value of the innovation and the fact that sharing this information with the licensee may facilitate imitation. We show that a licensor signals her technology type with an output-based payment (or royalty) and may leave some of the rents with the licensee. Conditions under which exclusive license contracts (linear and nonlinear) and nonexclusive linear contracts are used to transfer technology are identified.

Disaggregate Analysis of the Demand for Gasoline

In this paper, we adopt a disaggregate approach to modeling the components of gasoline demand. Gasoline demand in our model is viewed as the outcome of the following household decisions: vehicle holdings (number and type) and vehicle usage (nondiscretionary and discretionary usage). Modeling gasoline demand in this way correctly specifies gasoline as an input into the production of transportation services and allows for the interdependence between household decisions on vehicle holdings and usage. Moreover, estimation of the components of gasoline demand allows policymakers to identify the means by which individuals will respond to policy changes. This leads to more effective policies designed to reduce gasoline consumption. We use this model to estimate price and fuel efficiency elasticities of vehicle usage and gasoline demand.

A contractual approach to the gray market

Parallel imports are genuine products imported without the authorization of the trademark or copyright owner in a country. Authorized dealers have employed trademark and copyright law to exclude parallel imports using claims of infringement. Our assertion is that trademark and copyright laws are inappropriate for enforcing restrictions against parallel imports for two reasons. First, trademark exclusion of parallel imports indiscriminately eliminates intrabrand competition and should be scrutinized from an antitrust perspective. Second, trademark laws inefficiently constrain the feasible set of distribution systems. We propose a policy combining contract, tort, and antitrust law to regulate parallel imports.

Private agreements for coordinating patent rights: the case of patent pools

Inventors and users of technology often enter into cooperative agreements for sharing their intellectual property in order to implement a standard or to avoid costly litigation. Over the past two decades, U.S. antitrust authorities have viewed pooling arrangements that integrate complementary, valid and essential patents as having pro-competitive benefits in reducing prices, transactions costs, and the incidence of legal suits. Since patent pools are cooperative agreements, they also have the potential of suppressing competition if, for example, they harbor weak or invalid patents, dampen incentives to conduct research on innovations that compete with the pooled patents, foreclose competition from downstream product or upstream input markets, or soften competition with outside substitutes that do not rely on the pooled patents. In synthesizing the ideas advanced in the economic literature, this paper explores whether these antitrust concerns apply to pools with complementary patents and, if they do, the implications for competition policy to constrain them.

On vertical control in monopolistic competition

Abstract This paper demonstrates that vertical restraints are profitably imposed by a manufacturer or wholesaler who has some market power and whose product is sold in a monopolistically competitive downstream market. Simple conditions are developed under which a price floor (resale price maintenance) or a price ceiling is profitable, and under which private incentive for a restraint is sufficient for its social desirability. Where demand elasticities are constant, observed vertical price floors are always welfare-improving but profitable price ceilings may decrease welfare. In the special case of the CES-aggregate-surplus specification with competitive conjectures, price ceilings are profitable and welfare-decreasing.

Producer-Consumer Trade-Offs in Export Cartels: The Wheat Cartel Case

Since the formation of the Organization of Petroleum Exporting Countries (OPEC), several models of cartel-competitive fringe markets for an exhaustible resource have been developed. Derivations of Nash-Cournot equilibrium price paths under such a regime and insightful behavioral descriptions of limit pricing by monopolists facing potential competition have enriched the literature concerning this market structure (Salant and Gilbert and Goldman). In addition, the gains to producers from cartelization in the oil, copper, and bauxite industries have been derived empirically (Pindyck). Largely in reaction to OPEC, numerous discussions have focused on an important but different commodity than those mentioned above. Several proposals (supported by many producers and consumers) have been put forth to form a cartel in wheat among the major exporters: the United States, Canada, Australia, and Argentina.1 If such a cartel were organized, which group or groups have the most to gain? The above studies on exhaustible resources do not distinguish between producer and consumer effects in the exporting countries largely because domestic demand for this type of good is small relative to the total amount exported. In oil, for example, there is little need to distinguish between a producer export cartel, which maximizes producer returns, and a government cartel which maximizes the welfare of all groups since the solutions would be very similar. However, this is not necessarily the case for other commodities where domestic demand is an important component of market structure (e.g., in wheat the domestic demand is large relative to total wheat exports).2 The purpose of this paper is to consider a market in which the commodity in question has a relatively large domestic demand component and to demonstrate that a sharp distinction has to be made between a producer export cartel and a government export cartel. This paper shows (abstracting from implementation issues raised by Caves, Pindyck, and McCalla and Schmitz) that producers actually may lose from a government cartel. The conditions under which this can happen are derived theoretically. The model is then applied to the world wheat economy; and, interestingly, the empirical results suggest that there is a strong possibility that producers would, in fact, lose from a government wheat cartel if there are decreasing returns in production unless compensated by a tax on consumers. This result raises several important policy issues.

Do patents work? Thickets, trolls and antibiotic resistance

This paper connects ideas from recent literature on the economics of intellectual property (IP) to address the question: Did the strengthening and broadening of IP rights from important patent policy changes in the US promote greater innovation? The analysis rests on the theory of cumulative innovation, which shows that if IP rights on a pioneer invention extend to follow-on research and impediments to contracting exist, then strengthening patents can actually reduce overall innovation. Recent empirical studies are consistent with the theory: patents can significantly deter follow-on research in complex technology areas where contracting is difficult (computers, electronics, telecommunications) but not in drugs, chemicals and human genes. I outline remedies from court decisions and antitrust policy for addressing inefficiencies from patent trolling, patent thickets and the anti-commons of fragmented ownership. I then apply the analysis to the antibiotics market, drawing on recent research, to examine how patent and competition policies can be used to improve incentives for drug development in the battle against antibiotic resistance. The literature provides persuasive evidence that the policy changes overreached in broadening and strengthening IP rights and reveals important patent reforms for improving the effectiveness of patent systems in the US and Canada.

Sequential development of correlated projects: An application to coal liquefaction

Abstract In this paper, a sequential research and development programme is considered for which several categories of related technologies are available to develop, each having the potential to produce some final product. At each stage of the programme, an optimal portfolio of technologies is chosen, given the information acquired from the previous stages, and those contingent optimal plans are followed in all subsequent stages. The model is applied to coal liquefaction technologies to emphasize the costs that may be incurred by erroneously approaching the development programme as a once-and-for-all endeavour rather than in a sequential framework. The results of the synthetic oil application indicate that the acceleration of the programme may be optimal when the probability of successful development decreases. Under these conditions, adoption of a ‘crash programme’ in which all projects are researched simultaneously, may lead to deferral of synthetic oil development.