The Economic Underpinnings of Patent Law

Abstract

PATENTS play a crucial role in the economy. The economic principles underlying the patent system have not always been well understood, especially in the courts. In part, the difficulty lies in two circumstances: first, that innovation is essentially the creation of information, which has different economic characteristics from goods, and second, that the patent system, while effectively dealing with this primary problem of the special nature of innovation, nonetheless creates secondary economic problems. And in part the esoteric nature of patent law has obscured the way in which patent law doctrines deal with these secondary problems. This article, after analyzing the secondary economic problems created by the patent solution to the information aspect of innovation, will show in detail how patent law has effectively, if often inarticulately, minimized the impact of these problems. To start with, it is important to recognize the primary problem that the patent system solves. This problem-often called the "appropriability problem"-is that, if a firm could not recover the costs of invention because the resulting information were available to all, then we could expect a much lower and indeed suboptimal level of innovation. In short, the patent system prevents others from reaping where they have not sown and thereby promotes research and development (R&D) investment in innovation. The patent law achieves this laudable end by creating property rights in inventions. In creating these property rights known as "patents," however, secondary problems are created that can lead to market