[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Soon after Henry Ford’s Model T had burst into the American marketplace—its
sales rocketed from 58,000 in 1909 to 730,000 in 1916—Ford was taken to court for
infringing upon the patent of George Baldwin Selden, who argued that his patent
covered all self-propelled, gasoline-powered vehicles. Selden tried to force Ford and
other pioneers of the automobile industry to pay royalties to him, but Ford successfully
challenged the patent claim. Recently controversies have concerned patents
in genetic engineering and superconductivity. Does a firm that decodes a fraction
of a gene and establishes a use for that information, for example, get a patent? If so,
does the patent cover the fraction in question or the whole gene?
The original innovators have every incentive to claim broad patent coverage, encompassing
their own product and those that are in any way related. Later entrants argue
for narrow coverage, so that they will be allowed to produce variants and applications
without paying royalties. As usual in economics, there is a trade-off. Broad coverage
ensures that the first inventor reaps more of the returns on her innovation. But excessively
broad coverage inhibits follow-on innovation, as others see their returns to further
developing the idea squeezed by the royalties they must pay to the original inventor.
Trade Secrets If patents protect the profits of innovation, why do many firms not
bother to seek patent protection for their new products and processes? A major
factor in this decision is the patent process itself, which requires applicants to disclose
the details of the new product or process—information that may be extremely
helpful to a firm’s rivals in furthering their own R & D programs.
To prevent such disclosure, companies sometimes prefer to keep their own innovations
a trade secret. A trade secret is simply an innovation or production process
that a firm does not disclose to others. The secret formula for Coca-Cola, for example,
is not protected by a patent. Trade secrets play an important role in metallurgy;
new alloys usually are not patented. But trade secrets have one major disadvantage
compared with patents. If a rival firm independently discovers the same new process—
for making an alloy, say—it can use the process without paying royalties, even though
it was second on the scene.
Some of the returns to an invention come simply from being first in the market.
Typically, the firm that first introduces a new product has a decided advantage over
rivals, as it builds up customer loyalty and a reputation. Latecomers often have a
hard time breaking in, even if there is no patent or trade secret protection.
Limitations to Patents There are other limitations to the use of patents. Many
of the most important ideas are not patentable—for instance, the basic mathematics
behind the inner workings of computers, discovered by Alan Turing. Turing received
no return on his innovation, which was of immense value. The ideas that led to the
transistor or to the laser—the understandings of the underlying physics—similarly
were not patentable.
What is considered patentable has changed over time. A recent new category of
patents involves business applications. Thus, the idea of a mutual fund with certain
distinctive characteristics, or a special type of auction provided by an Internet firm, might
today be patentable. Some people believe that these new patents have provided much
of the spur for the new economy. But many of these patents are being challenged on the
grounds that they are not sufficiently novel and nonobvious to deserve protection.
LINKS BETWEEN TECHNOLOGICAL CHANGE AND IMPERFECT COMPETITION ∂ 459