An Organizational Approach to the Design of Patent Law

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6 VERTINSKY FINAL_JAD (DO NOT DELETE) 2/27/2012 2:20 PM 250 MINN. J. L. SCI. & TECH. [Vol. 13:1 vate rather than public ordering. 178 The current debate over the role of regulators in limiting the royalty rates and other terms of private standard setting organizations provides a nice illustration of the debate over public versus private ordering. 179 Opportunities also arise for experimentation with new types of governance structures better adapted to the needs of particular transactions—such as different ways of separating ownership and control and new forms of public-private partnerships adapted to address particular kinds of market failures. 180 5. Institutions of Resource Allocation and Employment Much of the traditional study of patent law and innovation has taken place at this level, the continuous adjustment of market participants to price and quantity signals as they optimize objective functions—production functions, typically, in the context of firms. This level encompasses the study of how changes in marginal conditions such as patent scope and patent term length or the expected value of a resulting inventionproduct will alter decisions about activity levels in the production and use of inventions. 181 The tools of optimization theory provide useful avenues for exploring market adjustments in response to changes in rules or their enforcement. 182 However, the decision-makers are operating subject to bounded rationality, and their allocation choices are constrained by the combination of rules and their mechanisms for enforcement. Understanding in more detail how markets adjust, and the costs associated with such adjustments, is a critical missing link both in enriching traditional optimization models, and in deep- 178. See Williamson, Human Actors and Economic Organization, UNIVERSITÀ DEGLI STUDI DI SIENA 3 (1999) (It.) (citing Douglass C. North, Transaction Costs, Institutions, and Economic History, 140 J. INSTITUTIONAL & THEORETICAL ECON. 7 (1984)). 179. See, e.g., Richard A. Epstein, F. Scott Kieff, & Daniel F. Spulber, The FTC, IP, and SSOs: Government Hold-Up Replacing Private Coordination J. COMPETITION L. & ECON. (forthcoming Mar. 2012). 180. See, e.g., Philippe Aghion & Jean Tirole, Opening the Black Box of Innovation, 38 EUR. ECON. REV. 701, 703–08 (1994) (describing the R&D process as including creators, financiers, owners, and users of the invention and endogenizing the governance of R&D and distribution of investments, patent rights, and profits among the actors to explore organization of R&D). 181. Williamson, supra note 75, at 597. 182. See, e.g., Arthur B. Treadway, Adjustment Costs and Variable Inputs in the Theory of the Competitive Firm, 2 J. ECON. THEORY 329 (1970) (discussing the economic affects adjustment costs have on competition).
6 VERTINSKY FINAL_JAD (DO NOT DELETE) 2/27/2012 2:20 PM 2012] AN ORGANIZATIONAL APPROACH 251 ening transaction cost theories of patent law. 183 An important related area of empirical work lies in finding ways to identify and measure transaction costs, including a comparison of transaction costs relating to innovation activities in the presence and absence of patents. 6. Putting the Levels Together Taken together, these levels and the interaction between them can be used to characterize the institutional environment within which different policy parameters can be studied, and this provides a framework within which policy choices can be evaluated and compared. The figure below provides an illustration of this framework. 184 183. See Liza Vertinsky, Comparing Alternative Institutional Paths to Patent Reform, ALA. L. REV. (forthcoming), available at http://ssrn.com/abstract=1521137 (to access article, select One-Click Download); see also Barnett, Sharing in the Shadow of Property: Rational Cooperation in Innovation Markets, supra note 100 (discussing the role of private markets in shaping the limits on patent rights); Merges, supra note 15. 184. See Eva Lieberherr, Policy Relevance of New Institutional Economics? Assessing Efficiency, Legitimacy and Effectiveness, 5–7 (Ecole Polytechnique Fédérale de Lausanne, Working Paper No. 0906, 2009), available at http://mir.epfl.ch/files/content/sites/mir/files/users/181931/public/wp0906.pdf, for a further discussion of these levels.
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An Organizational Approach to the Design of Patent Law

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