Research on the MacroEconomic Effects of Patents

An Empirical Look at Software Patents -- James Bessen (Research on Innovation and MIT), Robert M. Hunt (Federal Reserve Bank of Philadelphia), May 2003: James Bessen (Research on Innovation and MIT) and Robert M. Hunt (Federal Reserve Bank of Philadelphia) in a study published in May 2003 present extensive statistical data and analysis to corroborate their hypothesis that software patenting has substituted rather than promoted R&D investments. Software patents are serving as cheap alternatives to real innovation.
Sequential Innovation, Patents, and Imitation - MIT Department of Economics Working Paper by James Bessen and Eric Maskin 2000: This article is written by two researcher from MIT and concludes, after giving mathematical models and experimental evidence, that in a dynamic world such as the software industry or consulting industry, firms may have plenty of incentive to innovate without patents and patents may constrict complementary innovation. It concludes that copyright protection for software programs (which has gone through its own evolution over the last decade) may have achieved a better balance than patent protection. This new model suggests another, different rationale for narrow patent breadth than the recent economic literature on this subject.
Deepak Somaya & David J. Teece 2000-11-30: Combining Inventions in Multi-invention Products: Organizational Choices, Patents, and Public Policy: Detailed study of the transfer costs generated by the patent system under various conditions, written by Deepak Somaya, economist at the University of Maryland, and David Teece, senior colleague at Univ of California in Berkely. The study estimates the (very high) transfer costs that are caused by patents in complex systems and examines various strategies for reducing these costs at the micro- and macro-economic (public policy) level.
Robert M. Hunt: You can patent that?: Article by an economist about the effects of Software and Business method patents in the USA and their history, including statistics, shows the role of the Court of Appeal of the Federal Circuit (CAFC), installed in the 1980s, lowered all barriers to patentability and made increasingly difficult to have patents revoked.
Waterson & Ireland: An Auction Model of Intellectual Property Protection: Patent vs Copyright: Michael Waterson and Norman Ireland, economists from the University of Warwick, constructs a parametrised game model to simulate the innovation game under a regime of pharma patents, plant variety protection, software patents and software copyright as well as many other situations. The model contains some simplifications that work in favor of patents. E.g. it does not consider monopoly-based welfare losses, which are at the center of many economic analyses of the patent system. Instead its social welfare is simply the aggretation of the potential players expected utilities. Also it does not consider the need for modularity and interoperability in the software world. Yet, the model depicts many observable phenomena quite well, and it leads to the conclusion that software patents have a negative effect on innovation while pharma patents and software copyright has a positive effect.
Stimuler la concurrence et l'innovation dans la Société d'Information: A systematic introduction to intellectual property rights, software economics and the interaction of the two. The beginning chapters provide very good introductory reading, the final chapters present proposals to European politics. The website contains links to many studies.
J.P. Smets 1999: Software Useright: Solving Inconsistencies of Software Patents: A mathematical model describing the economic effects of sofware patents and a concept for solving some of the problems: the distinction between copyright and useright.
Tang, Adams, Paré 2000: Patent Protection of Computer Programs: Study on Software Patents carried out by British researchers at the order of the European Commission's General Directorate for Enterprises. The findings of this study are partially based on the ESRCIP project (see above). It's purpose is to find out how software SMEs deal with Intellectual Property Rights in general and patents in particular, how useful patents are for them and what can be done to raise patent awareness. The study finds that we are not in a "pro-patent era" but rather in a "pro ipr area", and that software patents are not very much appreciated by software SMEs and probably not very helpful for them.
Intellectual Property Initiative 2000: A large british research project which concludes that the patent system as it stands in the year 2000 is in general less than helpful an instrument for fostering research and development in small and medium enterprises.
Commissariat Général du Plan 2002/10/17: Rapport sur l'Économie du Logiciel: A report of the French State Commission on Economic Planning published on 2002/10/17 gives figures about the software industry in France (270000 employees, 31,6 bn eur turnover in 1999), sees France's software economy handicapped by proprietary standards and patent dangers and recommends that algorithms and business methods should not be patentable, formats and standards should be exempted and patents for technical inventions that use software should be limited in duration to 3-5 years.
Studie von Fraunhofer und MPI über die wirtschaftlichen Auswirkungen von Softwarepatenten: In 2001-01, the German Federal Ministery of Economy and Technology (BMWi) ordered a study on the economic effects of software patentability from well known think tanks with close affinity to the German patent establishment: the Fraunhofer Institute for Innovation Research (ISI.fhg.de), the Fraunhofer Patent Agency (PST.fhg.de) and the Max Planck Institute for Foreign and International Patent, Copyright and Competition Law (MPI = intellecprop.mpg.de). The study was largely concluded in 2001-06 and preliminary results were presented to a selected audience. The final report was published by the BMWi on 2001-11-15. The study is based on an opinion poll answered by several hundred software company representatives and independent software developpers, conducted by Fraunhofer ISI. Most respondents have had little experience with software patents and don't want software patents to become a daily reality like in the US. The poll also investigated the significance of open source software for these companies and found it to be of substantial importance as a common infrastructure. Based on these findings, the Fraunhofer authors predict that an increase in the use of software patents will put many software companies out of business and slow down innovation in the software field. The study then jumps to conclude that software patents must be legalised and SMEs must be better informed about them. This surprising conclusion is drawn by the patent law scholars from MPI. The MPI's legal study does not explore any ways to redraw the borders between patents and copyright but just takes the EPO and USPTO practise as an inevitable reality. They find that the EPO's caselaw is contradictory and chaotic and blame this on Art 52.2c EPC, which they say has failed to provide clear guidance and should therefore be deleted. Business related algorithms are, they say, less likely to be patented at the EPO than algorithms that "stand in a tradition of engineering". The MPI writers however do not try to provide a clear rule for distinguishing the two, and they oppose the idea of drawing a line between the physical and the logical ("technical inventions" vs "rules of organisation and calculation") as done by lawcourts in the 70s and 80s, asserting that information is also a physical phenomenon. They propose that all legislative power concerning the limits of patentability be handed over to the EPO, which should then, at its discretion and as far as Art 27 TRIPs allows, consult experts of interested parties for regular rewriting of its Examination Guidelines. Art 27 TRIPs demands that patents be "available in all fields of technology", and the MPI understands "technology" as "the useful arts" and is careful not to mention Kolle and other European theoreticians of the concept of technical invention. Summarily the study can be summarised as "Fraunhofer: software patents are unpopular in the software industry and dangerous to innovation and competition. MPI: Fine, so let's legalise them quickly."
Commissariat Général du Plan 2002/10/17: Rapport sur l'Économie du Logiciel: A report of the French State Commission on Economic Planning published on 2002/10/17 gives figures about the software industry in France (270000 employees, 31,6 bn eur turnover in 1999), sees France's software economy handicapped by proprietary standards and patent dangers and recommends that algorithms and business methods should not be patentable, formats and standards should be exempted and patents for technical inventions that use software should be limited in duration to 3-5 years.
The Economic Impact of Patentability of Computer Programs: A patent advocacy text by the London Intellectual Property Institute, ordered by the Industrial Property Unit at the European Commission (CEC Indprop), finished in spring 2000, held back until Oct 2000. The name is misleading: this is not an economic study. There is only one chapter which deals with economics but even this chapter only roughly summarises third parties's works. Basically this pseudo-study only restates well-known beliefs of civil servants from the british patent establishment who at the time were in charge of the European Commission's Industrial Property Unit at DG Markt (Directorate General for the Internal Market). Yet, while main author Robert Hart is a well known patent lawyer and lobbyist, the economics chapter was written by an outsider, Peter Holmes. It provides evidence to show that software patents have damaging effects on economic development and tries to balance this by adding some unreasoned statements in favor of software patents. Holmes later explained that he had no other choice in view of the "convictions" of his partners. Yet the CEC Indrop people did not like the study: they locked it away for half a year. During this time the European patent establishment was preparing to rewrite Art 52 EPC so as to remove all limits of patentability. In October 2000, after the plans been dropped, CEC/Indprop suddenly published the IPI treatise and used it as a basis for a "consultation exercise". From then on, various pro software patent proposals from Brussels have again and again relied on this "economic study" for justification.
Daniel Probst: Software-Patentability from a macro-economic point of view: Dr. Probst forscht an der Universität Mannheim über die Ökonomie des Patentwesens. In diesem für eine Anhörung dem Deutschen Bundestages am 2001-06-21 eingereichten Papier argumentiert er, dass Patentmonopole aus volkswirtschaftlicher Sicht immer als je nach ihrem Anwendungsgebiet mehr oder weniger notwendige Übel angesehen werden. Wobei im Bereich der Software wenig Notwendigkeit und viel Übel zu erkennen ist. Viele der herkömmlich von Patentexperten propagierten Glaubenssätze sind aus volkswirtschaftlicher Sicht falsch, da auf simplistischen Modellen beruhend. Bisherige Erkenntnisse deuten darauf hin, dass Softwarepatente die gesamte Produktivität und Innovationskraft der betroffenen Branchen mindern. In einem Bereich wie der Software sollte der Staat, wenn ihm an der Vitalität der Softwarebranche gelegen ist, in öffentliche Infrastrukturen wie z.B. Bildung, Forschung und Netzwerk-Hardware investieren.
Bronwyn H. Hall & Rose Marie Ham: The Patent Paradox Revisited: Research work done at Univ. of California, Berkely, published 1999 by National Bureau of Economic Research Inc. Finds that the surge in patents in the semiconductor industry in the 1980-90s does not reflect a surge in R&D activity.
Kortum & Lerner 1998: What is behind the recent surge in patenting: Since the late 1980s, the number of patents granted to US companies by the USPTO has sharply risen. Many people believe that this is due to a more patent-friendly policy created by political changes in the early 80s such as the Bayh-Dole act and the institution of the Court of Appeal for the Federal Circuit (CAFC). This study collects statistical data to suggest that a surge in patentable innovation and an improvement in patent-oriented innovation managment may be more important causes. It also shows that software and biotech, while considered to be the most important areas of innovation, still amount for a total of only about 5% of the US patents. While patent-oriented innovation was on the rise, R&D investments on the whole dropped. This is one of a series of studies by Samuel Kortum and Josh Lerner from the Department of Economics of Boston University.
Lester C. Thurow 1997: Needed: A New System of Intellectual Property Rights: Squeezing today's innovations into yesterday's system simply won't work
US National Research Council 2000: The Digital Dilemma: According to this report by the US National Research Council, software patents were introduced by lawcourt decisions without support from the legislature, and it seems doubtful whether the patent expansion is promoting the progress of science and the useful arts, as Congress intended. The Court of Appeal of the Federal Circuit (CAFC) has taken the patent system into "unchartered waters", and the experience of the software industry suggests that this decision is urgently awaiting legislative review.
Mandeville et al 1982: Economic Effects of the Australian Patent System: A Commissioned Report to the Industrial Property Advisory Committee. Contains statistics about the use of the patent system as a source of information and as a source of revenues. Its general reasoning and conclusions are similar to those of most economists, especially Fritz Machlup. Some quotations:
Since the benefits of the patent system are so tenuous and subtle and the overall benefit/cost ratio is considered to be negative, there is no economic justification for extending patent monopolies by lengthening the term, or by widening the grounds for either infringement, or patentability (for example, plant variety rights or computer programs). However, in the light of our findings, there is considerable economic justification for policy action to reduce the negative effects of the patent system by stricter examination, by reducing the length of term and the scope of patent monopolies, and by action to deal with undesirable restrictive practices in patent licensing.
An historical awareness of the political economy of patent reform suggests that this task is not easy at the domestic policy level. This is basically because those who perceive they would lose by such reform are concentrated, powerful and active defenders of their interests. In contrast, those who would gain by patent reform are diffuse and hardly aware of their interest in the matter.
Apparently for the latter reason, this report shys away from officially recommending what the facts really suggest: abolishing the patent system. Only a few years later, the Australian Patent Office decided to make "software-related inventions" patentable.
Fritz Machlup 1962: The Production and Distribution of Knowledge in the United States
Fritz Machlup 1958: The economic foundations of patent law: Report to the US congress from 1958, which also extensively narrates the history of the patent movement and of earlier economic research on this subject. Machlup, a renowned American economist of Austrian origin, is the first author of a large treatise on knowledge economics and other treatises which belong to the teaching repertoire of economics departments in universities. His report cites a wealth of historical and economic evidence to refute most of the reasoning used by lawyers to legitimate the patent system.
Schiff 1971: Industrialisation without National Patents: In this monography, the economic historian Eric Schiff tells the story of the emergence of some of Europe's biggest corporations. They came into being in Switzerland and the Netherlands during the period (1850-1907 in Switzerland; 1869-1912 in the Netherlands) in which neither country recognised patents. Some of them appear to owe their very existence to this exemption. Switzerland and the Netherlands eventually adopted patent laws in response to threats from other industrialised nations. This, Schiff argues, was a political decision, not an economic one. It is, he notes, "difficult to avoid the impression" that the absence of patent laws "furthered, rather than hampered development".
Guardian 2002-03-12: Patent Nonsense: Monbiot.com report about industrialisation without patents, quoting historian Eric Schiff to argue that countries without the patent system fared better and that the decision for introducing this system was due to political pressure from patent lobbies rather than to economic considerations
Maastricht University Portal on Information Economy and Intellectual Property: This site exhibits a collection of study reports, several written in 2001, under titles such as "Intellectual Property Rights in a Knowledge Based Economies" about the impact of patents, copyright and other exclusion rights on the production of information. All these reports express concern that these rights may on the whole have been on the whole doing more harm than good, and software patents are cited as extreme examples. These reports are part of a larger endeavor of research about the economics of information, involving the Maastricht Economic Research Institute on Innovation and Technology (MERIT), which has since the 1980s gradually become a European center for studies in this field.
Can Patents Deter Innovation? The Anticommons in Biomedical Research: article by Michael A. Heller and Rebecca S. Eisenberg, University of Michigan Law School, published in Science, 1998 May 1;280(5364):698-701. Show how the generalization of patents hinders innovation in the biology area.
Antitrust Policy, Innovation Efficiencies, and the Suppression of Technology: Article by John J. Flynn, College of Law, the University of Utah, published in the Antitrust Law Journal, 1998. In depth analysis of the effects of monopolies generated by patent inflation in general.
US National Academies: Intellectual Property Rights in a Knowledge-Based Economy: various ongoing USAmerican research projects
Paris 2002/06: Papers for "Frontiers of Ownership in the Digital Economy": Papers presented by the participants at a seminar held in Paris in June 2002, among them many economists and social scientists from the US.
TIIP: Technological Innovation and Intellectual Property: An attempt by several economists in the US to keep track of research on the impact of patents on information innovation by writing occasional reviews of articles. Founded in early 2002. Several issues have appeared.
FTC 2002: Hearings on Anti-Competitive Effects of Patents: In the USA, recent trends toward extensive patentability and rigid IP enforcement laws have given rise to complaints about chilling effects on innovationn and competition. In particular, concerns were raised about standardisation being disrupted by patents. Some people proposed to mandate by law that that standards be freely available and that any relevant submarine patents be disclosed early. In spring of 2002 the Federal Trade Commission conducted an expert hearing on this subject. Representatives of standardisation bodies explained that the proposed legal requirements could backfire, because they would deter companies from participating in standardisation. Some economists and programmers asked for restrictions on what can be patented or how patents can be used. Representatives of the USPTO and patent lawyers argued that everything was just fine and competition law should not interfere with patent rights. FTC has published many testimonies and reports as PDF files on its website. We are presenting an overview of these texts and what can be learnt for them for the patentability discussion.
Cohen et al 2000: Appropriability Conditions and Why U.S. Manufacturing Firms Patent: Cohen, Wesley M., Nelson, Richard R. und Walsh, John P. (2000): Protecting their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or not). Cambridge: National Bureau of Economic Research, Working Paper 7552. Shows that patents are not promoting innovation in the field of mechanics.
Cohen, Julie und Lemley, Mark (2000): Patent Scope and Innovation in the Software Industry: in: Columbia Law Review 89(1): 1-57. Finds that software patent claims are too broad, last too long and are at odds with the economics of the software industry. Proposes some special legislation for patents in the field of software that might alleviate the problem.
Softwarepatenter.dk: Economics Articles: A collection of pointers to articles on software patent economics
Bernard Lang: Annotated Links on the Software Patentability Debate: contains a long list of commented references to studies on swpat economics
Le Monde: entretien avec Joseph E. Stiglitz: Article in Le Monde in which Nobel Prize in economy 2001 Joseph E. Stiglitz says that the TRIPS intellectual property regime is detrimental to innovation and economic growth.
Krummenacker 2000-05-18: Are "Intellectual Property Rights" Justified?: An assessment of the merits and demerits of patents, copyright, trademark and business secrets in view of the needs of an information economy. Describes models for generating revenue which do not require patents and copyrights. This text is well readable and cites economic studies but is more of a libertarian manifesto than an economic study itself.
Problems with the current Intellectual Pseudo "Property" (IPP) System, specifically with Patents: An outline of some of the problems and the spectrum of positions taken by various parties. Then, an attempt is made to extrapolate into the future a bit in four scenarios, to see what the world might look like under different patent regimes, ranging from no patents at all to much more severe restrictions than today. If these scenarios are accurate in their implications, they could help us define which future we might find desireable and acceptable to live in, which will hopefully encourage us enough to take appropriate steps towards implementing and shaping the corresponding legal landscape. The four scenarios are "Stand on each others shoulders -- no patents", "stand on each others feet -- unlimited patentability", "restricted patentability", "replace patents by innovation tax".
Françis-René Rideaux: Patents Are An Economic Absurdity: Another liberal manifesto against the patent system, with detailed economic argumentation and interesting references
LPF Irlam: Quotes on Software Patents: see also Quotations on Software Patents
Survey of recent studies on economic effects of logic patents: Short reviews of recent studies, published on the FICPI (patent lawyers association) website, points out limitations of these studies, especially of Bessen & Maskin, and strives to create the impression that all evidence is inconclusive. Yet quite informative.
ESC 2002-09: Europe should reconfirm Non-Patentability of Software!: The Economic and Social Council of the European Union, a consultative organ of experts from various fields, criticises the European Patent Office's software caselaw and the European Commission's proposal for a software patentability directive and asks the European Parliament to reject the proposal and instead ask for a reconfirmation of the non-patentability of software. This study met strong resistance from a group of supporters of the European Patent Office, but was in the end passed with a 2/3 majority.
Monopoly Commission 2002-07-08 report warns against software patents and CEC directive proposal: Die Monopolkommission, eine mit dem Bundeskartellamt und dem Wettbewerbsreferat des Bundesministeriums für Wirtschaft und Technologie (BMWi) verbundene Körperschaft öffentlichen Rechts, berichtet in ihrem 14. Hauptbericht über den aktuellen Stand der Konzentrationen und Monopolbildung in der deutschen Wirtschaft. Der Bericht verneint die volkswirtschaftliche Nützlichkeit von Softwarepatenten, kritisiert die "mit dem Wortlaut von Art 52 EPÜ unvereinbare" Rechtsprechungspraxis des Europäischen Patentamtes und empfiehlt der Bundesregierung, der von der Europäischen Kommission angestrebten Legalisierung solcher Patente eine Absage zu erteilen.


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