Download This PaperPatents as Hedges
60 Pages Posted: 29 Nov 2023
Date Written: November 8, 2023
Abstract
The overriding justification offered for patents has been to optimally induce innovative technological activity by preventing free riding—that is, uncompensated appropriation of innovative information by third parties. Yet, patent law presents several puzzles for its putative free riding rationale. First, ordinary patent infringement has never required copying. Second, recent empirical studies have shown that copying is often costly and time-consuming. Third, there are many costly and risky economic activities subject to free riding that are not protected by patent-like rights. Some commentators have relied upon these doubts of patent law’s free riding premise to propose weakening patent rights, such as by requiring copying as an element of infringement. This Article extends the incentive theory of patents to explain why patents should reach wholly independent activity. Leveraging the work of Joseph Schumpeter, I argue that patents best promote innovation when used as “hedges” against potential competition. On this account, innovators who are first to the market can enjoy supernormal profits without patents or other IP rights. Patents reduce the risk of profit erosion from competition—of which free riding is merely one form—and stem the concomitant erosion of profits, thereby increasing incentives to innovate. Nonetheless, overly suppressing competition may dampen innovation and lead to other social costs. Fine-tuning the nature and scope of patent rights therefore requires a delicate balance between these competing forces.
Keywords: Patents; Schumpeter; hedges; risk; intellectual property; independent invention; innovation
JEL Classification: O30, O31, O32, O33, O34
Suggested Citation: Suggested Citation