Week 2: IP’s Philosophical and Economic Underpinnings

IP's Philosophical and Economic Underpinnings

Week 2: IP’s Philosophical and Economic Underpinnings

“The Philosophy Behind IP … The Economics of IP”
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  • Week 2: IP's Philosophical and Economic Underpinnings > The Philosophy Behind IP > The Philosophy of IP Protection
  • Week 2: IP's Philosophical and Economic Underpinnings > The Economics of IP > IP as a Public Good
  • Week 2: IP's Philosophical and Economic Underpinnings > The Economics of IP > Macroeconomic Principles
  • Week 2: IP's Philosophical and Economic Underpinnings > The Economics of IP > Costs and Negative Externalities in IP Law
  • Week 2: IP's Philosophical and Economic Underpinnings > The Economics of IP > Real-World Implications

Week 2: IP’s Philosophical and Economic Underpinnings > The Philosophy Behind IP > The Philosophy of IP Protection

  • So now we’re going to talk about the theory of intellectual property rights and the central debate in intellectual property law.
  • The agenda for the lecture is to start out by asking why, why do we have intellectual property rights at all? What’s the purpose of them? In doing so, in answering the question, why we have intellectual property law, we need to discuss a little bit about economics.
  • What is the real debate going on in intellectual property law? I think that all the debates you see in the media about intellectual property, on TV, in the newspapers, and so forth, come, at the end of the day, back to a single central issue, which is, how much intellectual property rights we want to have? How does the trade-off work, making sure the trade-off works in favor of society and not against it.
  • Why have intellectual property rights? Well, the philosophy of intellectual property can really be thought of in at least three different ways.
  • I am justified in claiming property over it, and therefore, that’s the right way to organize ourselves around it.
  • The idea of personhood is that, for maximum human flourishing, for people to really be people, we need to allow them to have control over parts of their persons, and that their intellectual creations, whether, again, it’s an invention, a work of creativity like a song, or a book, or maybe even a logo, or a brand name, are works of the mind.
  • The third area, a third philosophy that could be used to justify intellectual property law is utilitarian theory.
  • Among these three theories, you can see pieces of them if you look, sort of, across the world, comparisons of intellectual property law, different countries have different sorts of flavors.
  • France, for example, has a lot of natural rights as part of their intellectual property law.
  • In the United States, we are really, really utilitarianism when it comes to intellectual property rights, and we think of ourselves as almost 100% utilitarian in our intellectual property rights.
  • Article 1, Section 8, Clause 8 says that, to promote the progress of science and the useful arts by securing for limited times to authors and inventors the exclusive rights to their respective writings and discoveries.
  • Maybe Congress can’t produce or create any intellectual property rights law that doesn’t promote progress of science and the arts.
  • So at the end of the day, what we are in the United States is utilitarian, in terms of our approach to intellectual property law, and this comes from the Constitution.
  • What that means is, we are constantly thinking about intellectual property law and evaluating intellectual property law in terms of whether it benefits society overall.
  • So what are the ends? What are we trying to get from intellectual property law? So in copyright, we talk about creative works of expression.
  • In some ways, you can think about intellectual property like real property, like traditional real property.
  • So we give people the rights, for example, to have property rights in their home, their yard, right? So think of your yard, for example.
  • We give people property rights over those inventions, those creative works, so that they can exclude others from the scope of them and in general, gives them control.
  • At the same time, we need to understand that intellectual property rights are an interference with the free market.
  • One of the things to ask yourself is, is that intervention justified? And we’re going to talk about this throughout the course, but it’s good to just keep this in mind as you look at the cases, as we discuss the various issues that arise in intellectual property law.
  • Won’t creative works be created anyway? How much does copyright really matter to people who just want to create music? How much does patent law matter to people who really just want to invent things, who just want to work in labs and create new things for the sake of creating, and not so much for the economic return? Aren’t there already pretty powerful incentives to innovate? There are a lot of things you can get by creating new innovations that don’t involve intellectual property law.
  • These are not necessarily intellectual property law concepts.
  • So one of the things we need to ask as we’re thinking about intellectual property law is, are there alternatives? Would we get the same amount of creative goods or the same amount of inventions even absent intellectual property law, because people already have, sort of, built-in incentives to do the things we want them to do anyway? And so, we need to always keep our eye on what the market failure is.
  • What is the reason we need to intervene, the reason we need to have an intellectual property law in order to fix some problem in the marketplace?

Week 2: IP’s Philosophical and Economic Underpinnings > The Economics of IP > IP as a Public Good

  • Lighthouses have particular economic characteristics that we think are actually really similar to invention, innovation and creativity.
  • One, is that they’re non-rival, which means that the fact that I’m using the good, for example, if I’m looking at the lighthouse from afar, I’m not interfering in any way with your ability to do the same thing.
  • The other thing that public goods have in common is that they are non-excludable, meaning it’s very difficult, if not impossible, to prevent people from looking at a lighthouse.
  • If I broadcast my idea, if I tell people my idea, I’m not going to be able to stop people from telling each other.
  • It’s going to be very difficult to exclude people from that idea once it’s out there in the world.
  • The idea behind public good economics is that, absent some sort of government intervention, we won’t have enough of them.
  • Because there is no economic incentive to build lighthouses if you can’t exclude people from the ability to use it.
  • If I can’t charge people to use my lighthouse, why would I do it? Why would I spend my money to create a lighthouse and not be able to get any return on it? And so, the idea here is that, absent some sort of government intervention, you’re not going to get enough of these goods.
  • If I can’t prevent people from downloading my music, then why would I make music? I might, just because I’m creative and I want to do it.
  • On the other hand, I might make more music, I might try harder at making my music, I might have higher production values, if I can exclude people.
  • So the activity of intellectual property law, the goal, the overall goal, is to address this public goods problem, to convert what are otherwise non-rival, non-excludable goods into effectively rival and excludable goods.
  • Of course, is to always stop and ask, does this really describe it? And I hinted at one potential problem earlier, which is, maybe, at least some parts of intellectual property creations are not really public goods.
  • It might be that even without copyright law, you would have a whole lot of music because lots of people just have it in their bones to create music, to create artistic works of any kind.
  • It might be that many people just really want to invent things.
  • The University of Pennsylvania, like most major research universities, are full of people who just want to invent.
  • It’s not going to create somebody who has no capacity for invention to find a cure for cancer.
  • People who are really good at music can be musicians, get paid for it.
  • It is converting this public good of invention, innovation, and creativity into a rival and excludable good.
  • In doing so, is creating just enough incentive, we hope, to get people over the line, to get those people who are sort of, I could do it, I could create a new invention, I could create some more music, I could spend more money.
  • What protecting trademarks does is protects investments and goodwill.
  • That’s the investment that these companies have put into creating this brand awareness and creating the products that make you think about the underlying source of the goods.
  • Now, why is that good? Well, investments in goodwill have a couple of important benefits.
  • First, they make it easy for me as a consumer to find the goods that I want on the marketplace.
  • Because if I know that I want an Intel chip in my next laptop, I can look for the Intel logo.
  • Second, and a little more subtly but probably even more importantly, allowing NBC, GE, Intel, and so forth, to create trademarks and invest in goodwill means that they will invest in product quality.
  • That’s the incentive structure that we’re creating in a trademark system, is to encourage companies to create more goodwill, which should then result in lower search costs and higher product quality throughout the economic spectrum.

Week 2: IP’s Philosophical and Economic Underpinnings > The Economics of IP > Macroeconomic Principles

  • In a competitive market, those of you who’ve looked at any- studied any economics already know- over time, prices will approach the marginal cost of producing that extra good.
  • If I’m making Frisbees, for example, then over time, assuming other companies can also make the same good, we will all approach marginal cost.
  • In a less competitive market, the prices rise because, if no one else can make my Frisbee, then I can charge more for it, and it increases my potential returns.
  • We mean that, by having this right, in the marketplace you can price your goods, your services, whatever it is that you’re creating and selling, above traditional marginal cost, and therefore reap some economic return.
  • The y-axis is the price of the goods that are being offered.
  • So if you look at the left part of the graph, if the price is very high, very few people are going to buy it, so the quantity produced is going to be very low.
  • At that point, that’s how much quantity is produced of that particular good, because that’s how many people either want to or can afford to purchase the good at the competitive equilibrium price.
  • When there’s an actual economic monopoly, what happens is the person with the monopoly raises the price.
  • They raise the price to a point at which they can maximize their total revenue, which is shown here in the red square.
  • They will find that by moving the price higher and higher, and obviously there will be fewer and fewer people purchasing the good.
  • So they will keep continuing to raise the price until they get to the point where they can maximize the total area under those two intersecting lines, and maximize their total revenue.
  • So similar to the monopoly context, if I have a patent, for example, on my Frisbee, I’ll raise the price.
  • Because people can’t manufacture my Frisbee- other companies, competitors- I have some ability to raise my price.
  • How much I can raise my price largely depends on how good mine is compared to all of the other options on the marketplace.
  • If it’s a really great Frisbee and I’ve got a really good patent on it, I can raise the price more.
  • If it’s really not that much better than what already exists, then I’m not going to be able to rise my prices very much.
  • In any event, I’ll get some benefit from the intellectual property right, and I will be able to increase my price.
  • Whatever point I can increase my price to the point where I can maximize my total revenue given the competitive landscape- again, I don’t have a pure monopoly, so there are going to be other companies out there that are going to eat into my ability to raise prices- but I will try and maximize my revenue.
  • Now, I’m going to make it up by the higher prices, so I’m going to have more revenue.
  • What it is is it’s the fact that, when you have higher prices- whether they are monopoly prices or just supra-marginal prices, just increased prices as the result of having an intellectual property right- fewer people are going to be able to take advantage of the good.
  • So because I have intellectual property rights on my new book, for example, I can charge it at a price higher than the paper and ink actually costs.

Week 2: IP’s Philosophical and Economic Underpinnings > The Economics of IP > Costs and Negative Externalities in IP Law

  • In addition to these monopolization costs, dead weight loss, intellectual property rights can create rent seeking behavior that can potentially restrict future innovation or creativity, and they have significant administrative costs.
  • This is the dead weight loss idea, the idea that as prices rise above simple marginal costs, that you’re going to lose the ability for some people in society to have access to the goods, which has real costs.
  • Rent seeking is another potential problem cost with intellectual property rights.
  • Although we like to think that people are going to try and get those rights by doing the things we want them to do, like creating new works of expression or inventing new things that we want, it will be the case that people will sometimes do things that are not in society’s best interest.
  • So in the patent context, one of the downsides of offering patents is that people may, multiple companies may race to create a particular good, and the person who gets to the finish line first who gets the patent wins, but the costs are is that everybody else who is engaged in the race loses their investments.
  • That’s a downside from society’s overall perspective, because those costs have now been lost because people are racing to get the intellectual property right, rather than just doing the innovation that they might have done otherwise.
  • Some of the strategic behavior and patent litigation that we’re seeing going on right now, the patent trolls and things like that that people talk about and you’ve probably seen in the media could be viewed as a version of rent seeking, a cost of having intellectual property rights.
  • Similar to copyright- if I have a copyright on a particular song, any songs that are similar to mine, I’m going to have the potential for a lawsuit, for litigation, and so forth.
  • The Patent and Trademark Office is a huge facility, just outside of Washington, DC, that screens all patents and trademarks.
  • Because there are more disputes than ever before in IP right now, courts are having to expand, take on new staff, build new buildings, find more room for more cases.
  • For all of these reasons, the administrative costs of having an intellectual property system are continuing to rise, and the question is whether the benefits are offsetting the rise.

Week 2: IP’s Philosophical and Economic Underpinnings > The Economics of IP > Real-World Implications

  • So One of the implications of granting intellectual property rights, in addition to the costs associated with them, is that the economic reward they we’re offering to people who get intellectual property rights is determined by the market.
  • If you make an invention, an invention that’s a significant leap forward and really allows you to command a premium price in the marketplace, is going to make you more money and thereby, reward you more than one that was a smaller, more incremental development.
  • Because we give out intellectual property rights in the form of these property rights, and the way that they work is by providing economic returns, it does mean that we are, in a sense, distorting our intellectual activity in a direction towards those things which are likely to get significant amounts of marketplace return.
  • One only needs to watch TV to see many ads there are for erectile dysfunction drugs and other related products, to know that that’s where a ton of money goes into research and development.
  • So this is all to say that although we think that we are doing the right thing by offering these property rights for intellectual property law, we need to understand that economic returns is just one measure of social value.
  • That said, having economic returns, having property rights be private, allows for tremendous flexibility and adaptability.
  • What that means, is that the people who own intellectual property rights largely get to determine how they’re used, when they’re used, by whom they’re used, and so forth.
  • Lots of people have intellectual property rights, and they don’t enforce them.
  • On the other hand, offering property rights has important costs, right? We’ve already talked about the less competitive markets leading dead-weight loss, can stimulate undesirable activities, it can harm future activities as well, as well as the significant costs.
  • So at the end of the day, in order to understand whether intellectual property rights work as a society- And again we are utilitarian, so it has to work to justify fire it being in our legal system- you have to put the gains on one side and the costs on the other.
  • You get more innovation, more creativity, more works of expression, more goods.
  • You’re going to get more commercialization and more products.
  • We can stimulate more investment in invention, expressive activity, and so forth.
  • This is the central question in intellectual property law, which is- You can graph this as the social benefit being on the y-axis here, where the higher the curve is, the more benefit society is getting from our intellectual property rights.
  • So the stronger the rights are, that’s going to vary the amount of social benefits.
  • So if I have a very broad patent system, that means inventors get more return, there’s going to be more incentive to create new inventions.
  • What this ends up looking like, is that as you increase the strength of rights away from zero- so starting in the left hand corner of that graph, that would be no intellectual property rights at all, so we would not be getting any benefit from those intellectual property rights- as you increase the strength of the rights, you’re going to get a social gain.
  • Right? You’re going to get the incentive effects.
  • You’re going to start creeping back down the curve as you increase the rights.
  • Because you can say that we are, for example, on the left hand side of the curve, right? If you think that we are on the left-hand side of the curve, then we need to strengthen the rights.
  • We need to increase the scope of patents, maybe increase the term of copyrights, maybe expand trademark protection into new areas in order to increase the amount of rights and therefore, encourage people to do more, create more social benefit.
  • On the other hand, if you think that we’re on the other side of the curve, if our intellectual property rights are too strong, then the policy answer is to weaken the rights and try and get back up to the peak point of the curve by diminishing the amount of rights we give whether it’s again, decrease the patent term for example.
  • Whatever it is to weaken the incentives and the costs associated with intellectual property rights, you want to do that.
  • Not too much, not too little, so that we’re right at the peak of the curve.
  • When the technology changes, what we know for sure is that new business models develop, new challenges emerge to intellectual property law, and we’re almost certainly going to move from that point on the curve to some other point.

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