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+      "text": "# Innovation and Cooperation: Implications for Competition and Antitrust\n\nThomas M. Jorde and David J. Teece\n\nN obel Laureate Robert Solow and his colleagues on MIT's Industrial Productivity Commission recently noted (Dertouzos, Lester, and Solow, 1989, p. 7): \"Undeveloped cooperative relationships between individuals and between organizations stand out in our industry studies as obstacles to technological innovation and the improvement of industrial performance\u201d and later (p. 105) that \u201cinterfirm cooperation in the U.S. has often, though not always, been inhibited by government antitrust regulation.\u201d These striking conclusions warrant further exploration.\n\nUnfortunately, industrial organization textbooks still discuss horizontal cooperation and competition almost exclusively in terms of standard cartel theory. (On the other hand, vertical cooperation/contracting is viewed differently, and some textbooks provide treatments of supplier-buyer relationships in which cooperation is viewed as enhancing efficiency.) Both in the textbooks and in policy discussion among economists, cooperation among competitors is highly suspect, being perhaps the last bastion of what was once referred to as the \u201cinhospitality tradition\u201d in antitrust. As a result, very little literature addresses how cooperation among competitors can promote competition, notwithstanding that cooperation among competitors may sometimes be essential if innovating firms are to compete in today's increasingly global markets (Imai and Baba, 1989) . Such cooperation is already important in Japan and in Europe. $^1$\n\n1For instance, cooperative R&D and related activities have been important to the success of the Western German machine tool industry. The industry formed a strong association that has a research and teaching institute at Aachen. The West German industry has been described as\n\n\u25a0 Thomas M. Jorde is Professor of Law, University of California, Berkeley, California. David J. Teece is Mitsubishi Bank Professor, Walter A. Haas School of Business, University of California, Berkeley, California.\n\n76 Journal of Economic Perspectives",
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+      "text": "University of California, Berkeley, California. David J. Teece is Mitsubishi Bank Professor, Walter A. Haas School of Business, University of California, Berkeley, California.\n\n76 Journal of Economic Perspectives\n\nThis paper begins by describing the nature of the innovation process. We then explore socially beneficial forms of cooperation that can assist the development and commercialization of new technology, and suggest modifications to current U.S. antitrust law that would remove unnecessary impediments to organizational arrangements that support innovation and stimulate competition in the United States. The modifications we propose would create \u201csafe harbors\u201d for various forms of cooperative activities among competitors in unconcentrated markets, and they would permit cooperation in concentrated markets if commercialization and appropriability were thereby facilitated. These modifications would bring U.S. antitrust laws closer to what is already in place in Europe and Japan and would promote competition more assuredly than would existing law. $^2$\n\nWe have no illusion that our proposed changes, standing alone, would dramatically improve the performance of U.S. industry, though specific industries might be transformed. However, the changes we propose in antitrust have the attraction that they do not require the expenditure of public funds. In short, we see existing law as a self-imposed impediment to U.S. economic performance. $^3$",
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+      "text": "e expenditure of public funds. In short, we see existing law as a self-imposed impediment to U.S. economic performance. $^3$\n\n## The Nature of Innovation\n\nInnovation is the search for, and the discovery, development, improvement, adoption and commercialization of new processes, new products, and new organizational structures and procedures. 4 It involves uncertainty, risk taking, probing and reprobing, experimenting, and testing. It is an activity in which \u201cdry holes\u201d and \u201cblind alleys\u201d are the rule, not the exception. Many of these aspects are well-known and have been frequently analyzed in the economics literature.\n\n\"groups of clubs\" (Collis, 1988, p. 95) because of the nature of the cooperation displayed. The Italian machine tool industry around Modena is similarly organized, as is the Italian textile industry and the Danish furniture industry. A review of examples of cooperative activity abroad is part of the authors' ongoing research.\n\n2 There is no necessary conflict between promoting cooperation and competition, if the cooperation improves efficiency or advances innovation. As Schumpeter (1942, p. 85) pointed out, when compared to competition among firms with similar products and technologies, the competition that counts \u201ccomes from the new commodity, the new technology, the new source of supply.... This kind of competition is as much more effective than the other as bombardment is in comparison with forcing a door, and so much more important that it becomes a matter of comparative indifference whether competition in the ordinary sense functions more or less promptly.\u201d\n\n3 As this Journal of Economic Perspectives issue goes to press, the House Judiciary Committee approved the \u201cNational Cooperative Production Amendments of 1990\u201d (H.R. 4611), a bill that incorporates many of the changes we suggest in this article and which we have been advocating since 1988. We discuss the provisions of H.R. 4611 and additional antitrust changes that we believe would advance innovation and U.S. competitiveness later in this article.\n\n$^{4}$ Dosi (1988) provides an excellent review of the innovation literature.\n\nThomas M. Jorde and David J. Teece 77\n\nHowever, other aspects of innovation, particularly its organizational requirements, have not been sufficiently explored. The traditional serial model that has served as the basis for current antitrust policy is described below. Its inadequacies are then addressed in light of the \u201c simultaneous \u201d nature of the process, which is particularly relevant in certain industries, like microelectronics, experiencing high rates of technological change. 5\n",
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+      "text": "t policy is described below. Its inadequacies are then addressed in light of the \u201c simultaneous \u201d nature of the process, which is particularly relevant in certain industries, like microelectronics, experiencing high rates of technological change. 5\n\n\n## The Traditional Serial Model\n\nTraditional descriptions of the innovation process commonly break it down into a number of stages which proceed sequentially and theoretical treatments of R & D in industrial organization reflect this model. According to this view, the innovation process proceeds in a linear and predictable fashion from research to development, design, production, and then finally to marketing, sales, and service (Grossman and Shapiro, 1986, p. 319; Tirole, 1988, p. 389). In simple models, there is not even any feedback or overlap between and among stages.\n\nIf the serial model adequately characterizes innovation today, then it is mainly the innovation which occurs in some scale-intensive industries. The initial development of nylon at Dupont perhaps fits this model. The Manhattan Project during World War II is also illustrative. The serial model does not address the many small but cumulatively important incremental innovations that are at the heart of technological change in many industries, especially well-established industries like semiconductors, computers, and automobiles. The serial model of innovation is an analytic convenience which no longer adequately characterizes the innovation process, except in special circumstances.\n\nThe serial model has enabled economists to model innovation as a vertical process. Inasmuch as antitrust policy toward vertical restraints is very permissive, many economists and legal scholars do not understand how U.S. antitrust laws could stand in the way of the various kinds of standard and non-standard contracting often needed to support the commercialization of innovation. But as we shall see, matters are not so simple.\n",
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+      "text": "the various kinds of standard and non-standard contracting often needed to support the commercialization of innovation. But as we shall see, matters are not so simple.\n\n\n## The Simultaneous Model\n\nThe simultaneous model of innovation recognizes the existence of tight linkages and feedback mechanisms which must operate quickly and efficiently, including links between firms, within firms, and sometimes between firms and other organizations like universities. From this perspective, innovation does not necessarily begin with research; nor is the process serial. But it does require rapid feedback, mid-course corrections to designs, and redesign. $^6$ This concep-\n\n$^{5}$ This argument is presented at greater length in D. Teece $(1989 a)$.\n\n6This process has also been termed \"cyclic\" (Gomory, 1987, p. 72). The popular press has even begun to recognize and discuss the simultaneous nature of innovation and effective commercialization. See \"A Smarter Way to Manufacture,\" Business Week, April 30, 1990, 110-117 (discussing \"concurrent engineering\").\n\n78 Journal of Economic Perspectives\n\ntualization recognizes aspects of the serial model \u2014 such as the flow of activity, in certain cases through design to development, production and marketing \u2014 but also recognizes the constant feedback between and among activities, and the involvement of a wide variety of economic actors and organizations that need not have a simple upstream-downstream relationship to each other. 7 It suggests that R & D personnel must be closely connected to the manufacturing and to marketing personnel and to external sources of supply of new components and complementary technologies, so that supplier, manufacturer and customer reactions can be fed back into the design process rapidly. In this way new technology, whether internal or external, becomes embedded into designs which meet customer needs quickly and efficiently.\n\nThe simultaneous model visualizes innovation as an incremental and cumulative activity that involves building on what went before, whether it is inside the organization or outside the organization, and whether the knowledge is proprietary or in the public domain. The simultaneous model also stresses the importance of the speed of the design cycle, and flexibility. IBM followed this model in developing its first PC, employing alliances with Microsoft and others to launch a successful personal computer system. Sun Microsystems and NeXT Computer launched themselves in this way and have remained in this mode for subsequent new product development. Microprocessor development at Intel often follows this logic too.",
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+      "text": "ch a successful personal computer system. Sun Microsystems and NeXT Computer launched themselves in this way and have remained in this mode for subsequent new product development. Microprocessor development at Intel often follows this logic too.\n\nWhen innovation has this character, the company which is quickest in product design and development will appear to be the pioneer, even if its own contribution to science and technology is minimal, because it can be first to \u201cdesign in\u201d science and technology already in the public domain. Both small and large organizations operate by this model, reaching out upstream and downstream, horizontally and laterally to develop and assemble leading edge systems.\n\nIn short, much innovation today is likely to require lateral and horizontal linkages as well as vertical ones. As we discuss below, and particularly for small firms, innovation may require accessing complementary assets which lie outside the organization. If innovating firms do not have the necessary capabilities in-house, they may need to engage in various forms of restrictive contracts with providers of inputs and complementary assets. The possibility that antitrust laws could be invoked, particularly by excluded competitors, thus arises. Lying in the weeds to create mischief for unsuspecting firms engaged in socially desirable but poorly understood business practices are plaintiffs' attorneys and their expert economists entreating the courts to view reality through the lens of monopoly theory and modern variants such as raising rivals. These theories\n\n7Moreover, the linkage from science to innovation is not solely or even preponderantly at the beginning of typical innovations, but rather extends all through the process. \u201cScience can be visualized as lying alongside development processes, to be used when needed\u201d (Kline and Rosenberg, 1986). Design is often at the center of the innovation process. Research is often spawned by the problems associated with trying to get the design right. Indeed, important technological breakthroughs can often proceed even when the underlying science is not understood.\n\nInnovation and Cooperation: Implications for Competition and Antitrust 79\n\nhave been honed in the context of a hypothetical world of unchanging technology. If new technology does arrive it often falls like manna from heaven; behavior which is anticompetitive in the static context may be procompetitive in a dynamic one. Because the study of innovation is largely outside the mainstream of economic research and antitrust jurisprudence, the possibility of expensive and distracting litigation followed by judicial error is significant.",
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+      "text": "mpetitive in a dynamic one. Because the study of innovation is largely outside the mainstream of economic research and antitrust jurisprudence, the possibility of expensive and distracting litigation followed by judicial error is significant.\n\nParadoxically, the giant integrated enterprises are not most heavily at risk. Instead, most at risk are mid-sized enterprises that have developed and commercialized important innovations, because such firms are likely to have some market power (under orthodox definitions) and have the need to engage in complex forms of interfirm cooperation. Because of these risks, managers may choose to forego socially desirable arrangements and investments, and innovation and the competition it engenders will be attenuated.",
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+      "text": "nd the competition it engenders will be attenuated.\n\n## Organizational Requirements of Innovation\n\nWhether innovation is serial or simultaneous, it requires the coordination of various activities. The serial model suggests a rather simple organizational problem; the simultaneous model a more complex one, often employing various forms of non-standard contracting. To the extent that economists employ just the serial model, they greatly oversimplify the organizational challenges which innovation provides and underestimate potential antitrust problems. Also, they probably exaggerate the importance of research and downplay the importance of other factors. As discussed below, except in special cases, a firm's R & D capability is for naught if it cannot organize the rest of the innovation process efficiently and effectively, particularly if that innovation is taking place in an already-established industry.\n\nFor innovations to be commercialized, the economic system must somehow assemble all the relevant complementary assets and create an interactive and dynamically efficient system of learning and information exchange. The necessary complementary assets can conceivably be assembled by administrative processes, or by market processes, as when the innovator simply licenses the technology to firms that already own the relevant assets, or are willing to create them. These organizational choices have received scant attention in the context of innovation. Indeed, the serial model relies on an implicit belief that armslength contracts between unaffiliated firms in the vertical chain from research to customer will suffice to commercialize technology. In particular, there has been little consideration of how complex contractual arrangements among firms can assist commercialization \u2014 that is, translating R & D capability into profitable new products and processes. The one partial exception is a tiny literature on joint R & D activity (Grossman and Shapiro, 1986; Ordover and Willig, 1985); but this literature addresses the organization of R & D and not the organization of innovation. 8\n\n$^{8}$ For a more complete statement of our own views on this, see Teece $(1977,1989 b)$.\n\n80 Journal of Economic Perspectives",
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+      "text": "literature addresses the organization of R & D and not the organization of innovation. 8\n\n$^{8}$ For a more complete statement of our own views on this, see Teece $(1977,1989 b)$.\n\n80 Journal of Economic Perspectives\n\nIf innovation takes place in a regime of tight appropriability\u2014that is, if the technological leader can secure legal protection, perhaps by obtaining an ironclad patent (Teece, 1986)\u2014and if technology can be transferred at zero cost as is commonly assumed in theoretical models, the organizational challenge that is created by innovation is relatively simple. In these instances, the market for intellectual property is likely to support transactions enabling the developer of the technology to simply sell its intellectual property for cash, or at least license it to downstream firms who can then engage in whatever valueadded activities are necessary to extract value from the technology. With a well-functioning market for know-how, markets can provide the structure for the requisite organization to be accomplished.\n\nBut in reality, the market for know-how is riddled with imperfections (Arrow, 1962) . Simple unilateral contracts, where technology is sold for cash, are unlikely to be efficient (Teece, 1980, 1982) . Complex bilateral and multilateral contracts, internal organization, or various hybrid structures are often required to shore up obvious market failures (Williamson, 1985; Teece, 1986) . This section will examine various market failures and the institutional arrangements which can ameliorate them.",
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+      "text": "1985; Teece, 1986) . This section will examine various market failures and the institutional arrangements which can ameliorate them.\n\n## Technology Transfer Efficiency\n\nThe transfer of technology among the various activities that constitute innovation is not costless. This is especially true if the know-how to be transferred cannot be easily bundled and shipped out in one lot \u2014 which is clearly the case when the development activity must proceed simultaneously and when the knowledge has a high tacit component. 9 In these instances, the required transfer of technology cannot be separated from the transfer of personnel, which is typically difficult if the contractual relationship is arms-length and non-exclusive.\n\nBesides the problems of getting technology-driven concepts to market, there is the converse problem of getting user-driven innovations to developers. In some industries, users other than the manufacturers conceive of and design innovative prototypes. The manufacturers' role in the innovation process is somehow to become aware of the user innovation and its value, and then to manufacture a commercial version of the device for sale to other users. User-dominated innovation accounts for more than two-thirds of first-to-market innovations in scientific instruments and in process machinery used in semiconductor and electronic subassembly manufacture (von Hippel, 1988). Clearly, user innovation requires two kinds of technology transfer: first from user to manufacturer, and then from the manufacturer to the developer-user and other users.\n\nMirroring the role that users play in stimulating innovation upstream is the role that suppliers play in stimulating downstream innovation. For example, a good deal of the innovation in the automobile industry, including fuel injection,\n\n$^{9}$ For a review of the characteristics of know-how, see Winter (1987) and Teece $(1989 ~b)$.\n\nThomas M. Jorde and David J. Teece 81",
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+      "text": "omobile industry, including fuel injection,\n\n$^{9}$ For a review of the characteristics of know-how, see Winter (1987) and Teece $(1989 ~b)$.\n\nThomas M. Jorde and David J. Teece 81\n\nalternators and power steering, has its origins in upstream component suppliers. Bendix and Bosch developed fuel injection and Motorola the alternator. The challenge to the manufacturer then becomes how to \u201cdesign in\u201d the new components and how to avoid sole source dependency. As discussed below, deep and enduring relationships need to be established between component developer-manufacturers and suppliers to ensure adoption and diffusion of the technology. 10 These relationships, while functionally vertical, could well turn out to be viewed as horizontal by a court. Unless the courts have an adequate model of innovation and competition presented to them, beneficial contractual arrangements with attendant restraints could well be viewed negatively.",
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+      "text": "ual arrangements with attendant restraints could well be viewed negatively.\n\n## Scale, Scope, and Duplication Issues\n\nSuccessful new product and process development innovation often requires horizontal and lateral as well as vertical cooperation. It is well understood that horizontal linkages can help overcome scale barriers in research; they can also assist in defining technical standards. But it is common to assert that if firms need to engage in joint research to achieve these economies, the maintenance of competition requires that firms participating in joint research work go their own way with respect to related activities such as manufacturing. However, a requirement that firms participating in a joint research arrangement commercialize the technology independently can impose an unnecessary technology transfer burden. As discussed above, the imposition of a market interface between \u201cresearch\u201d and \u201ccommercialization\u201d activities will most assuredly create a technology transfer challenge, a loss of effectiveness and timeliness, and higher costs.\n\nCollaborative research also reduces what William Norris, CEO of Control Data Corporation, refers to as \u201c shameful and needless duplication of effort \u201d (David, 1985) . Independent research activities often proceed down identical or near-identical technological paths. This is sometimes wasteful and can be minimized if research plans are coordinated. The danger of horizontal cooperation, on the other hand, is that it may reduce diversity. This concern is legitimate and is commonly stressed by economists. $^11$ Unquestionably, a system",
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+      "text": "n, on the other hand, is that it may reduce diversity. This concern is legitimate and is commonly stressed by economists. $^11$ Unquestionably, a system\n\n10 A related set of vertical relationships involving innovation has been remarked upon by Rosenberg (1972, pp. 98\u2013102) in his treatise on technology and American economic growth. The machine tool industry in the 19th century played a unique role both in the initial solution of technical problems in user industries, such as textiles, and as the disseminator of these techniques to other industries, such as railroad locomotive manufacture. Rosenberg's description suggests that the users played a role in the development of new equipment. He notes that before 1820 in the United States, one could not identify a distinct set of firms that were specialists in the design and manufacture of machinery. Machines were either produced by users or by firms engaged in the production of metal or wooden products. Machinery-producing firms were thus first observed as adjuncts to textile factories. However, once established, these firms played an important role as the transmission center in the diffusion of new technology.\n\n11 Nalebuff and Stiglitz (1983) argue that the gains from competition may more than offset the losses from duplication. Also, Sah and Stiglitz (1989) show that in a model with ex post Bertrand competition where there is knowledge of which research projects others are undertaking, the number and range of research projects undertaken will be a constrained Pareto optimum.\n\n82 Journal of Economic Perspectives\n\nof innovation that converges on just one view of the technological possibilities is likely to close off productive avenues of inquiry.\n\nHowever, a private enterprise economy without horizontal coordination and communication offers no guarantee that the desired level of diversity is achieved at the lowest cost. In addition, cooperation need not be the enemy of diversity. If firms can coordinate their research programs to some degree, duplication can be minimized without the industry converging on a single technological approach. Indeed, Bell Labs has been noted for the very considerable internal diversity it has been able to achieve, at least in the pre-divestiture period.",
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+      "text": "hout the industry converging on a single technological approach. Indeed, Bell Labs has been noted for the very considerable internal diversity it has been able to achieve, at least in the pre-divestiture period.\n\n## Rent Dissipation Issues\n\nInnovation has well-known free rider and public good characteristics. Know-how leakage and other spillovers impair incentives to innovate by redistributing benefits to others, particularly competitors and users. To maintain adequate incentives to invest in innovative activity, without providing government subsidies, free riding must be curtailed. This is how economists justify patents, copyrights, trade secrets, and other aspects of intellectual property law.\n\nThe organizational form in which innovation takes place, interacting with the protection provided by intellectual property law (Teece, 1986), will affect the degree of rent dissipation which the innovator experiences. If the innovation has value and intellectual property protection is effective, an innovator specializing just in early stage activity is in a good position to capture a portion of the returns from innovation.\n\nBut surveys show that intellectual property law has a limited ability to provide protection from imitation, 12 even though there have been recent efforts by the courts to tighten enforcement. For a sample of 48 patented product innovations in the chemical, drug, electronics and machinery industry, one group of researchers found that within four years of their introduction, 60 percent of the patented successful innovations in the sample were imitated (Mansfield et al, 1982) . Not surprisingly, the social returns to innovation are greater than the private returns. Underinvestment in innovative activities is to be expected.\n\nA \u201cresearch joint venture\u201d may not do enough to overcome appropriability problems, unless many potential competitors are in the joint venture. Thus, a",
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+      "text": "is to be expected.\n\nA \u201cresearch joint venture\u201d may not do enough to overcome appropriability problems, unless many potential competitors are in the joint venture. Thus, a\n\n12See Levin, Klevorick, Nelson, and Winter (1987). These researchers surveyed R&D managers in various industries. The survey shows that, on a seven-point scale (1 = not at all effective, 7 = very effective) for 18 industry categories with 10 or more respondents, managers in only chemicals (specifically drugs, plastic materials, inorganic chemicals, and organic chemicals) and petroleum refining rated process patents effectiveness higher than 4 on the scale, and only these same chemical industries and steel mills rated product patents higher than 5. These findings make very clear that managers have little confidence that patents suffice as mechanisms to protect intellectual property from free riders. The results also show that other methods of appropriation such as first mover advantages (lead time and learning curve advantages), secrecy, and investment in sales or service support were more effective.\n\nInnovation and Cooperation: Implications for Competition and Antitrust 83\n\nsingle firm or even a consortium with good intellectual property protection will often need to bolster its market position and its stream of rents by other strategies and mechanisms. These mechanisms include building, acquiring, or renting (on an exclusive basis) complementary assets and exploiting first-mover advantages. We use the term complementary assets to refer to those assets and capabilities that need to be employed to package new technology so that it is valuable to the end user. 13 Broad categories of complementary assets include complementary technologies, manufacturing, marketing, distribution, sales, and service.\n\nIt is essential to distinguish further between generic and specific complementary assets. Generic assets include general purpose facilities and equipment and nonspecific skills; they tend to be disembodied and codified and hence easy to transfer. Specific assets, on the other hand, include highly differentiated system and firm-specific assets and skills. Specific assets and capabilities are typically embedded in the organization; or even if not embedded in the organization (like a specialized machine) are of reduced value in a different organizational context. In a sense, specific assets represent the firm's particular assemblage of physical assets and prior learning. Accordingly, they are difficult for competitors to replicate.",
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+      "text": "ine) are of reduced value in a different organizational context. In a sense, specific assets represent the firm's particular assemblage of physical assets and prior learning. Accordingly, they are difficult for competitors to replicate.\n\nThus, when imitation of aspects of a firm's technology is easy, it is essential for firms to be world-class\u2014or to be linked to partners who are world-class\u2014in the less imitatable complementary activities. Accordingly, the best defense against product imitators may well be the development of a less easily imitatable superior manufacturing process to make the product, or it may be the firm's superior service capability. In short, because a firm's comparative advantage in research does not necessarily coincide with an advantage in the relevant complementary assets, the expert performance of the innovator's contractual partners in certain key activities complementary to the easily imitatable activities is often essential if the innovator is to capture a portion of the profits that the innovation generates. The antitrust laws must be shaped so that they do not impair such beneficial linkages.\n\nIn this regard, many British and American firms responsible for important product innovations have captured very little value from innovations for which they have been responsible because of their weaknesses in manufacturing. Often competitors can quickly reverse engineer new products. Once the new product design is apparent to competitors, success in the marketplace is determined by manufacturing costs and quality. In these circumstances, firms that are excellent at manufacturing\u2014and this excellence is often harder to replicate than a new product is to reverse engineer\u2014can garner practically all of the profits associated with the new product designs. Hence it is critical that\n\n13 There has been almost no treatment in the economic literature of the concept of complementary assets. It does not map easily into the familiar concept of indivisibilities, which is perhaps the closest analogue. For a more complete treatment, see Teece (1986).\n\n84 Journal of Economic Perspectives\n\ninnovating firms protect themselves from such outcomes by developing or somehow uniquely accessing the requisite complementary assets. The next section explains why cooperation may be necessary for firms to perform this function.",
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+        "Innovation and Cooperation: Implications for Competition and Antitrust",
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+      "text": "rotect themselves from such outcomes by developing or somehow uniquely accessing the requisite complementary assets. The next section explains why cooperation may be necessary for firms to perform this function.\n\n## Governance Alternatives\n\nThe previous section has argued that innovation often requires firms to enter complex contracts and relationships with other firms to bring technology to the market, and to hold imitators at bay. This section considers in more detail the range of organizational alternatives available to the innovator to generate, coordinate and control such complementary assets.\n\nConsider first the price mechanism. Theoretical treatments generally assume that the requisite coordination and control can be achieved by the invisible hand. Efficient levels of investment in complementary assets are brought forward at the right time and place by price signals. Entrepreneurship is automatic and costless. This is the view implicit in textbook presentations; in turn, the textbook view seems implicit in U.S. antitrust law.\n\nHowever, many economists seem to have what Tjalling Koopmans calls an \u201coverextended belief\u201d regarding the efficiency of competitive markets as a means of allocating resources in a world characterized by ubiquitous uncertainty. Market failures are likely to arise because of the ignorance which firms have with respect to their competitors' future actions, preferences, and states of technological information (Koopmans, 1957, part II). In reality, nothing guarantees that investment programs are made known to all concerned at the time of their inception. This uncertainty is especially high for the development and commercialization of new technology. Accordingly, innovating firms need to achieve greater coordination than the price system alone appears to be able to bring about.",
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+        "Innovation and Cooperation: Implications for Competition and Antitrust",
+        "Governance Alternatives"
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+      "text": "rcialization of new technology. Accordingly, innovating firms need to achieve greater coordination than the price system alone appears to be able to bring about.\n\nA second mechanism for effectuating coordination is the administrative processes within the firm. A company's internal organization can serve to shore up some market imperfections and provide some of the necessary coordination. As Alfred Chandler (1977) has explained, the modern multidivisional business enterprise \u201ctook over from the market the coordination and integration of the flow of goods and services from the production of raw materials through the several processes of production to the sale to the ultimate consumer ... administrative coordination replaced market coordination in an increasingly large portion of the economy.\u201d Oliver Williamson (1985) has developed an elegant and powerful framework to explain the relative efficiencies of markets and administrative processes. However, one property of large integrated structures is that they have the potential to become excessively hierarchical and less responsive to market needs (Teece, 1989c). Accordingly, at least for some aspects of innovative activity, smaller organizations are often superior.\n\nThomas M. Jorde and David J. Teece 85\n\nIn between pure market and full administrative solutions are many intermediate and hybrid possibilities, including interfirm agreements. Interfirm agreements can be classified as unilateral (where $A$ sells $X$ to $B$ ) or bilateral (whereby $A$ agrees to buy $Y$ from $B$ as a condition for making the sale of $X$ , and both parties understand that the transaction will be continued only if reciprocity is observed). Such arrangements can also be multilateral.\n\nAn especially interesting interfirm agreement is the strategic alliance, which can be defined as a bilateral or multilateral relationship characterized by the commitment of two or more partner firms to a common goal. A strategic alliance might include (1) technology swaps, (2) joint R & D or co-development, and/or (3) the sharing of complementary assets, such as where one party does manufacturing and the other distribution for a co-developed product. If the common goal was simply price-fixing or market-sharing, such an agreement might constitute a cartel, especially if the agreement included substantially all members of an industry.",
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+        "Innovation and Cooperation: Implications for Competition and Antitrust",
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+      "text": "ibution for a co-developed product. If the common goal was simply price-fixing or market-sharing, such an agreement might constitute a cartel, especially if the agreement included substantially all members of an industry.\n\nBy definition, a strategic alliance can never have one side receiving cash alone; it is not a unilateral exchange transaction. Nor do strategic alliances include mergers, because alliances by definition cannot involve acquisition of another firm's assets or controlling interest in another firm's stock. Alliances need not involve equity swaps or equity investments, though they often do. Strategic alliances without equity typically consist of contracts between or among partner firms that are nonaffiliated. Equity alliances can take many forms, including minority equity holdings, consortia, and joint ventures. Such interfirm agreements are usually temporary, and are assembled and disassembled as circumstances warrant. Typically, only a limited range of the firm's activities are enveloped in such agreements, and many competitors are excluded.\n\nStrategic alliances, including consortia and joint ventures, are often an effective and efficient way to organize for innovation, particularly when an industry is fragmented. Interfirm cooperation preserves market selection and responsiveness; in a sense, it is the pure private enterprise solution. The case for planning and industrial policy recedes if a degree of operational and strategic coordination can be attained through private agreements. The benefits associated with less hierarchical structures can be obtained without incurring the disadvantages of insufficient scale and scope.",
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+      "text": ". The benefits associated with less hierarchical structures can be obtained without incurring the disadvantages of insufficient scale and scope.\n\n## Antitrust Treatment of Interfirm Agreements\n\nCurrent U.S. antitrust law needlessly inhibits interfirm agreements designed to develop and commercialize new technology. The problem is that the legal standards for interfirm agreements are ambiguous. While \u201crule of reason\u201d analysis will generally be applied to contractual arrangements designed to advance innovation, the elements of rule of reason analysis are quite muddled.\n\n86 Journal of Economic Perspectives\n\nIn addition, although current law seems to recognize a \u201csafe harbor\u201d for mergers and acquisitions between firms that will have less than 20 percent market share, it does not recognize a similar safe harbor for horizontal contractual arrangements among firms.\n\nThe Clayton Act also permits private parties to sue for treble damages for alleged antitrust injuries, and allows state attorney generals to recover treble damages on behalf of persons residing in the state. Successful plaintiffs can also recover attorneys' fees. These remedies are available only in the United States. They provide a powerful incentive for plaintiffs to litigate, and given the current state of the law, a powerful disincentive for businesses to form cooperative innovation arrangements and strategic alliances. While measuring the missed opportunities for cooperative innovation caused by the threat of treble damage litigation is difficult, we believe the loss is substantial. Moreover, these disincentives work to the particular detriment of small and medium-sized innovative firms in industries where the innovative process is simultaneous.",
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+      "text": "r, these disincentives work to the particular detriment of small and medium-sized innovative firms in industries where the innovative process is simultaneous.\n\nCongress has recognized that these provisions may inhibit technological innovation, and the National Cooperative Research Act (NCRA) of 1984 took two significant steps to remove legal disincentives to cooperative research. First, the NCRA provides that \u201cjoint research and development ventures\u201d must not be held illegal per se, and that such ventures instead should be \u201cjudged on the basis of [their] reasonableness, taking into account all relevant factors affecting competition, including, but not limited to, effects on competition in properly defined, relevant research and development markets.\u201d Second, the NCRA establishes a registration procedure for joint research and development ventures, limiting antitrust recoveries against registered ventures to single damages, interest, and costs, including attorney's fees. Thus, Congress eliminated the threat of treble damages for litigation challenging cooperative R&D arrangements, provided that the parties to the arrangement first register their venture. But R&D is only a small piece of the innovation puzzle.\n\nIn our view, the NCRA is not sufficiently permissive. The substantive protections provided by the NCRA\u2014guaranteed rule of reason treatment and reduction of damages\u2014extend only to research, and downstream commercial activity \u201creasonably required\u201d for research and narrowly confined to marketing intellectual property developed through a joint R & D program. Treatment of other agreements designed to facilitate innovation is thus left uncertain, to be determined only by interpretation of the \u201creasonably required\u201d standard. The NCRA unwisely precludes joint manufacturing and production of innovative products and processes, which is often necessary to provide the cooperating ventures with significant feedback information to aid in further innovation and product development, and to make the joint activity profitable. The NCRA implicitly accepts the serial and not the simultaneous model of innovation.\n\nIn addition, the NCRA gives little guidance concerning the substantive content of its rule of reason approach. While the Act did require that markets be defined in the context of research and not the products that might result from it, the NCRA fails to specify factors to be considered within rule of reason\n\nInnovation and Cooperation: Implications for Competition and Antitrust 87",
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+      "text": "s be defined in the context of research and not the products that might result from it, the NCRA fails to specify factors to be considered within rule of reason\n\nInnovation and Cooperation: Implications for Competition and Antitrust 87\n\nanalysis. It simply requires consideration of \u201c all relevant factors affecting competition, \u201d paying no special attention to the special characteristics of the innovation process in a quickly changing industry.\n\nFinally, while the NCRA's elimination of treble damages for registered ventures is an important step forward, cooperating firms are still not protected from antitrust litigation. Even after the NCRA, antitrust law still permits private plaintiffs to engage in treble damage litigation against cooperative arrangements facilitating commercialization. Moreover, single damages are still available even against those registered under NCRA. The cost of defending antitrust suits is not materially reduced by the exceedingly narrow circumstances in which the Act permits an award of attorneys' fees to prevailing defendants. Moreover, the threat of litigation, with attendant managerial distraction, can be extremely damaging to the competitive performance of a fast-paced industry.\n\nBusinesses seem to have recognized the limited nature of the steps taken by the NCRA. Not surprisingly, only 111 separate cooperative ventures registered under the NCRA between 1984 and June 1988. Our review of these filings indicates that they are very modest endeavors that are aimed at solving industry problems and are not of great competitive moment. We believe that if an approval procedure existed under which procompetitive arrangements could obtain exemptions from further antitrust exposure to private damage actions, then many more competitively beneficial ventures would utilize the NCRA.\n\nIn contrast to this picture of U.S. antitrust law, the antitrust and business environment in Japan and Europe is more hospitable to strategic alliances and cooperative arrangements for innovation. The basic Japanese attitude is that joint R & D activities are procompetitive and thus should not be touched by the Antimonopoly Act. Significantly, the literal Japanese translation of \u201cR & D\u201d \u2014 kenkyu kaihatsu \u2014 implicitly includes commercialization; there is no semantic distinction between the concepts of R & D and commercialization.",
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+    {
+      "text": "oly Act. Significantly, the literal Japanese translation of \u201cR & D\u201d \u2014 kenkyu kaihatsu \u2014 implicitly includes commercialization; there is no semantic distinction between the concepts of R & D and commercialization.\n\nIn Japan, the Fair Trade Commission is responsible for executing and enforcing the Antimonopoly Act of 1947, which (like the Sherman Act) broadly prohibits unreasonable restraints of trade. While the Act provides no specific legislative exemption for joint innovation arrangements, Japan's FTC has been able to exempt cooperative innovation efforts from the scope of the law by virtue of its power as the primary enforcer of the Act. $^14$ FTC policy also states\n\n14 The basic administrative policy outlining the standards by which such joint innovation efforts are to be scrutinized is contained in a report of Japan's Fair Trade Commission (1984, 37-39). The report states that the evaluation of the anticompetitive effect of joint R&D at the product market stage will depend significantly \u201con the competition and market shares among the participants and the market structure of the industry to which the participants belong\u2026. . . In cases where the market shares of the participants are small \u2026 the effects will be small.\u201d Although \u201csmall\u201d is not defined in the report, Japan's Merger Guidelines state that the FTC is not likely to closely examine cases in which the combined market share of the merging parties is less than 25 percent. See H. Iyori and A. Yesugi (1983, pp. 86\u201388). Our discussions with MITI and FTC officials confirm that the horizontal merger safe harbors would be equally applicable to cooperative contractual arrangements.\n\n88 Journal of Economic Perspectives\n\nthat if anticompetitive effects are alleged, the procompetitiveness benefits of innovation must be balanced, too. Balancing will take place not only within a particular market but also across markets (FTC, 1984), because \u201cthere is a possibility of the emergence of competition at the intersection of industrial sectors as a result of joint R&D between firms in different sectors.\u201d\n\nIn considering anticompetitive effects of cooperative innovation arrangements, Japan's FTC analyzes market shares and market structure. The FTC specifically recognizes the needs of innovators and articulates procompetitive justifications that include: (1) the difficulty of single-firm innovation; (2) the faster innovation created by cooperation and specialization between joint participants; (3) the pursuit of innovation in new fields by utilizing shared technology and know-how; and (4) enhancement of the technological level of each participant through the interchange of technology.",
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+      "text": "ion and specialization between joint participants; (3) the pursuit of innovation in new fields by utilizing shared technology and know-how; and (4) enhancement of the technological level of each participant through the interchange of technology.\n\nWhen MITI seeks to promote cooperative R&D activities (for example, as authorized by the Act for Facilitation of Research in Key Technology, or the Research Association for Mining and Manufacturing Technology Act), the FTC is consulted in advance. Once the FTC clears an activity, it is extraordinarily unlikely to pursue antitrust remedies at a future time. Significantly, treble damages are not available to private parties seeking to enforce Japanese antitrust laws, and private suits for single damages are very rare and usually unsuccessful. Thus, Japanese firms cooperating on innovation and commercialization of innovation have little to fear from Japanese antitrust laws.\n\nUnder this type of antitrust environment, it is not surprising that collaboration for innovation is frequent. Although regular statistics are not kept in Japan, because there is no reporting requirement for collaborative research and commercialization activities, a Fair Trade Commission report issued in 1984 contains statistics suggestive of the quantity and variety of joint innovation activities in Japan. The survey results indicate that joint R & D projects among corporations in the same industrial sector, which might be classified as horizontal collaboration, represent 19.1 percent of total projects. 15\n\nThe antitrust environment shaping cooperation in the European Community is also markedly different from the United States. In 1968, the European Commission issued a \u201c Notice of Cooperation between Enterprises \u201d which indicates that horizontal collaboration for purposes of R & D is normally outside the scope of antitrust concerns as defined in Articles 85 and 86 of the EEC Treaty. The Commission has consistently taken a favorable position on R & D",
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+      "text": "D is normally outside the scope of antitrust concerns as defined in Articles 85 and 86 of the EEC Treaty. The Commission has consistently taken a favorable position on R & D\n\n15Questionnaires were sent to 484 manufacturing corporations in the fields of electronics, telecommunications, automobiles, chemicals, ceramics, steel and nonferrous metals, whose stocks were listed in Tokyo and Osaka Stock Exchanges. Data was provided by 242 corporations, representing 1.9 percent of the total manufacturing industry that engage in R&D activities in terms of the number of corporations and 16.7 percent in terms of sales. As to the nature of the joint R&D projects, 54.3 percent of the total cases were developmental research. Basic and applied research were 13.6 and 32.1 percent respectively. In the case of large corporations with capital of more than 10 billion yen, the total basic and application research amounted to 52.1 percent.\n\nThomas M. Jorde and David J. Teece 89\n\nagreements unless the large entities involved imply serious anticompetitive consequences.\n\nIn 1984, the European Commission adopted Regulation No. 418/85 (hereafter Reg. 418) expanding the favorable antitrust treatment of R & D. For firms whose total market share does not exceed 20 percent, it provides blanket exceptions for horizontal R & D arrangements, including commercialization \u2014 which the Commission views as \u201c the natural consequence of joint R & D \u201d\u2014 up to the point of distribution and sales. 16 In addition, under Article 85(3), the Commission is authorized to grant exemptions for cooperative efforts that do not fall within the automatic safe harbor. Such exemptions may be granted when a horizontal agreement contributes to economic or technological progress in the research, production, or distribution of goods, and when procompetitive features outweigh anticompetitive aspects.",
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+      "text": "ntributes to economic or technological progress in the research, production, or distribution of goods, and when procompetitive features outweigh anticompetitive aspects.\n\n## Proposed Modifications to U.S. Antitrust Law\n\nTo insure that antitrust law is responsive to the needs of innovating firms and does not inhibit U.S. firms from competing effectively in global markets experiencing rapid technological change, we believe the following changes are in order:\n\nFirst, the rule of reason should be clarified to take specific account of the appropriability regime, the pace of technological change, the diversity of sources of new technology, the need to access complementary assets and technologies, and the need to have cheek-by-jowl cooperation to manage the innovation process simultaneously rather than serially.\n\nSecond, a safe harbor defined according to market power should be expressly adopted that would shield from antitrust liability interfirm agreements that involve less than 20 to 25 percent of the relevant market.\n\nThird, market definition should be tailored to the context of innovation and should focus primarily on the market for know-how; specific product markets become relevant only when commercialization is included within the scope of the cooperative agreement. Even then, the extent of appropriability should be factored in when analyzing product market issues. The geographic market should be presumed to be worldwide, with the burden upon the challenger to demonstrate otherwise.\n\n16 Regulation No. 418/85 of 19 December 1984 on the application of Art. 85(3) of the Treaty to categories of research and development agreements, O. J. Eur. Comm. (No. L 53) 5 (1985), entered into force March 1, 1985, and applicable until December 31, 1997. The statutory framework of Reg. 418 is complex. It applies to three categories of agreements involving R&D joint research and development of products or processes and joint exploitation of the results of the R&D (2) joint exploitation of the results of R&D product or processes pursuant to a prior agreements between the same parties; and (3) joint research and development of products without joint exploitation should the agreement fall within the purview of Art. 85(1). Under Reg. 418, joint exploitation is interpreted to mean joint manufacturing and licensing to third parties. Joint distribution and sales, however, are not covered and required individual exemptions pursuant to Art. 85(3).\n\n90 Journal of Economic Perspectives",
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+      "text": "tation is interpreted to mean joint manufacturing and licensing to third parties. Joint distribution and sales, however, are not covered and required individual exemptions pursuant to Art. 85(3).\n\n90 Journal of Economic Perspectives\n\nFourth, antitrust law should not bias the selection of interfirm organizational forms; at a minimum, integration by contract or alliance should be treated no less favorably than full mergers.\n\nFifth, the NCRA should be amended to include joint commercialization efforts to exploit innovation.\n\nSixth, an administrative procedure should be created, involving both the Justice and Commerce Departments, to allow evaluation and possible certification of cooperative arrangements among firms with higher market shares, when dynamic efficiency gains are likely and rivalry robust. We favor providing the opportunity for firms to either simply register and receive relief from treble damages as with the NCRA, or to apply for a certificate of exemption from the Justice and Commerce Departments that would provide even more protection. However, the quid pro quo would be greater disclosure and scrutiny of business plans. The firms themselves would choose which path to take.\n\nSeventh, private antitrust suits challenging cooperative innovation arrange- ments should be limited to equitable relief, and attorneys' fees should be awarded to the prevailing party.",
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+        "Innovation and Cooperation: Implications for Competition and Antitrust",
+        "Proposed Modifications to U.S. Antitrust Law"
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+      "text": "rrange- ments should be limited to equitable relief, and attorneys' fees should be awarded to the prevailing party.\n\nThe first four of these proposals could be accomplished by courts interpreting the rule of reason and the National Cooperative Research Act. We hope courts will not hesitate to employ the tools of evolutionary, common law interpretation and development to achieve these changes. However, to achieve the complete package of substantive and procedural changes most quickly, and thus assure certainty and predictability, legislation is the best overall solution. At a U.C. Berkeley Conference on \u201c Antitrust, Innovation and Competitiveness \u201d in October 1988, we distributed a draft of legislation that combined a \u201c registration \u201d and \u201c certification \u201d approach for cooperative commercialization ventures. Shortly thereafter, Congressmen Edwards (H.R. 1025) and Congressman Fish (H.R. 2264) advanced a \u201c registration \u201d approach to cooperative commercialization efforts and Congressmen Boucher and Campbell (H.R. 1024) proposed a \u201c certification \u201d approach. After three hearings on these bills, Chairman Jack Brooks of the House Judiciary Committee introduced and the Judiciary Committee passed the National Cooperative Production Amendments of 1990 (H.R. 4611). H.R. 4611 would amend the National Cooperative Research Act to extend its registration approach to joint production ventures. $^17$ At the same time, Attorney General Richard Thornburgh and Commerce Secretary Robert\n\n17Professor Jorde testified on July 26, 1989, in favor of both a registration and certification approach. See \u201cLegislative Proposals to Modify the U.S. Antitrust Laws to Facilitate Cooperative Arrangements to Commercialize Innovation\u201d (with David Teece), in Hearings Before the Subcommittee on Economics and Commercial Law, Committee on the Judiciary, U.S. House of Representatives (July 26, 1989). Legislation advancing a registration approach for production joint ventures has also been introduced in the Senate by Senators Patrick Leahy (D-VT) and Strom Thurmond (R-SC) (S.1006). Three aspects of H.R. 4611 bear noting. First, relevant market definition under rule of reason analysis would specifically consider the worldwide capacity of suppliers. Second, foreign participation in a production joint venture would be limited to 30 percent of the voting securities or equity interests, and all production facilities would have to be located in the United States or its\n\nInnovation and Cooperation: Implications for Competition and Antitrust 91",
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+        "Innovation and Cooperation: Implications for Competition and Antitrust",
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+      "text": "venture would be limited to 30 percent of the voting securities or equity interests, and all production facilities would have to be located in the United States or its\n\nInnovation and Cooperation: Implications for Competition and Antitrust 91\n\nMosbacher announced the Bush Administration's support of a registration approach for production joint ventures.$^18$\n\nAs mentioned above, we support both a registration and certification approach. We do not see them as alternatives. Rather, we believe they should be combined into a single, two-track approach. Firms could choose the level and then form of protection most appropriate for their joint activity. Greater disclosure could buy greater protection.\n\nThe case for these changes rests on three fundamental pillars. The first is that the innovation process is terribly important to economic growth and development, because it yields social returns in excess of private returns, and because innovation is a powerful spur to competition. Hence, if antitrust policy is going to err, it ought to do so by facilitating innovation, rather than inhibiting it. This principle is well-understood in Europe and Japan.\n\nSecond, economic theory tells us that if certain organizational arrangements are exposed to governmentally-imposed costs while others are not, firms will substitute away from the burdened forms (in this context, interfirm agreements) and in favor of the unburdened forms (in this context, hierarchy), even when the former are potentially economically superior. According to Aoki (1989), the slowdown in total factor productivity in the United States can be attributed in large part to a mismatch between organizational form and the requirements of new technology; in particular, he is concerned that hierarchical solutions are overused, at least in the United States. As we have explained at some length above, we are concerned that present laws do not give full recognition to the interorganizational requirements of the innovation process; failure to do so is damaging when innovation must proceed according to the simultaneous model.\n\nThird, cartelization of industries experiencing rapid technological change, and which are open to international trade and investment, is very difficult. So long as these industries remain open and innovative, antitrust policy should err on the side of permitting rather than restricting interfirm contracts.",
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+      "text": "pen to international trade and investment, is very difficult. So long as these industries remain open and innovative, antitrust policy should err on the side of permitting rather than restricting interfirm contracts.\n\nBeneficial cooperation will eventually expand if antitrust laws are revised along the lines we propose. The response may not be immediate, particularly with respect to consortia, because the experience base in U.S. industry in this area is thin, because of our antitrust history, and because U.S. firms, at least in the postwar period, have been large relative to their foreign competitors. Accordingly, the need to cooperate has not been as powerful in the past as it is now. However, once organizational learning accumulates, we expect consortia to begin to flourish even in the absence of government funding. We also expect\n\nterritories. Third, apparently production joint ventures would not be limited to efforts designed to commercialize joint R&D nor need they be related to innovation.\n\n18See Department of Justice release, \"Thornburgh Mosbacher Send Revision Legislation to Congress\" (May 7, 1990) (supporting and detailing \"legislation designed to facilitate joint production ventures\"), reported at Antitrust and Trade Regulation Report, p. 701 (Vol. 58, No. 1465) (May 10, 1990).\n\n92 Journal of Economic Perspectives\n\nthe reinforcement of bilateral alliances already common in U.S. industry. We briefly discuss the kinds of activities that might take place.",
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+      "text": "ment of bilateral alliances already common in U.S. industry. We briefly discuss the kinds of activities that might take place.\n\n## Cooperative Manufacturing and Commercialization\n\nIn a number of circumstances, cooperative activity beyond early stages will benefit innovating firms. As discussed, sometimes this is true because of scale, risk, and appropriability considerations. Sometimes it is true because prohibition of cooperative commercialization imposes a significant technology transfer problem, for instance from the research joint venture (if there is one) back to the funding companies. In most cases, firms will not wish to cooperate all the way from research through to commercialization. But in some instances they will, or they will wish to cooperate simply on a downstream production venture. When cartelization of the industry is not a threat, we see no reason for antitrust restraints.\n\nThe now defunct U.S. Memories, Inc. consortium wanted to invest $500 million to $1 billion to develop and manufacture for its members and for the market advanced dynamic random access memories (DRAMs). With fabrication facilities costing hundreds of millions, acting alone is beyond the financial resources of many companies in this industry who might otherwise wish to have some control over their DRAM supply. This proposed consortium had to contend with a number of difficulties, including threats of third party litigation (Jorde and Teece, 1989b) . While antitrust was not the main reason for the failure of this enterprise, the antitrust environment did nothing to help it succeed. A certification procedure would have provided important certainty to this venture, and others like it. A registration procedure would provide less certainty, but still would be a significant advance over current antitrust law.\n\nSimilarly, in the area of superconductors, it is likely that the real challenges will come not in developing superconductors, but in their commercialization. Applying superconductors in systems like railroads, computers, and electricity distribution will require great amounts of time, resources, and capital \u2014 probably greater than any single business can muster internally. Accordingly, a public policy stance that treats only early stage activity as potentially requiring cooperation is misguided and will thwart both early and later stage activities. Most firms will not have much incentive to engage in early stage, joint development if later stage, stand-alone commercialization appears too expensive to accomplish profitably.\n",
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+        "Innovation and Cooperation: Implications for Competition and Antitrust",
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+      "text": "isguided and will thwart both early and later stage activities. Most firms will not have much incentive to engage in early stage, joint development if later stage, stand-alone commercialization appears too expensive to accomplish profitably.\n\n\n## Cooperative Innovation Designed to Achieve Catch-Up\n\nCooperative activities in Japan and Europe have frequently been motivated by a desire to catch up with the world's technological frontier, which in the postwar years was usually the technology of U.S. firms. However, U.S. firms are increasingly slipping behind the frontier. For instance, U.S. firms are now behind in areas like ceramics and robotics, and in products like VCRs, facsimiles, and HDTV. Just as foreign firms have found cooperative ventures useful\n\nThomas M. Jorde and David J. Teece 93\n\nfor catch-up in the past, U.S. firms could utilize cooperation for this purpose. For example, U.S.-based firms, acting together and with foreign firms, may still have a slender chance of competing in the market for high definition televisions (HDTV) and related products expected to evolve in the 1990s. In the absence of cooperative interfirm agreements, we doubt that development of HDTV systems is possible in the United States. If America's potential \u201creentrants\u201d to the consumer electronics business combine to attempt reentry, they cannot be sure of avoiding serious antitrust problems involving treble damages, particularly if they are successful.\n\nAt minimum, the legislative changes proposed would facilitate unfettered information exchange and strategic coordination with respect to reentry strategies. If such efforts facilitated profitable reentry into high technology businesses when reentering would otherwise not occur, or would occur in a more limited and unprofitable way, we do not see why antitrust concerns ought to interfere.\n",
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+        "Innovation and Cooperation: Implications for Competition and Antitrust",
+        "Cooperative Innovation Designed to Achieve Catch-Up"
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+      "text": "sses when reentering would otherwise not occur, or would occur in a more limited and unprofitable way, we do not see why antitrust concerns ought to interfere.\n\n\n### Cooperation in Response to Foreign Industrial and Technology Policy\n\nIn high technology industries, both European and East Asian nations have active industrial and technology policies that significantly impact market outcomes, both in their own countries and abroad. Airbus is a case in point. The dominant U.S. attitude is one of laissez-faire, and many economists are of the view that the United States should send a letter of thanks to foreign governments who subsidize exports to the United States. Such a view is insensitive to the dynamics of technological change, to the importance of cumulative learning, and to reentry costs.\n\nSome U.S. policy makers, however, favor retaliation against foreign countries which have active industrial policies. We support a modification of U.S. antitrust laws which in some circumstances would permit a competitive response by U.S. industry acting collectively. The proposals we advance to encourage greater cooperation among U.S. firms do not require government expenditures nor do they involve the government \u201cpicking winners.\u201d But they would soften the tensions emerging in the United States between technology, antitrust and trade policies.\n",
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+        "Innovation and Cooperation: Implications for Competition and Antitrust",
+        "Cooperative Innovation Designed to Achieve Catch-Up",
+        "Cooperation in Response to Foreign Industrial and Technology Policy"
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+      "text": "s.\u201d But they would soften the tensions emerging in the United States between technology, antitrust and trade policies.\n\n\n## Conclusion\n\nThe past two decades have wrought significant changes in the business environment. Markets have become globalized, sources of new technology are increasingly pluralistic, and \u201c simultaneous \u201d systems of innovation have substituted for linear, hierarchical ones. Moreover, the ability of foreign firms to utilize technology developed in the United States has increased markedly. Imitation is easier, not harder, in spite of recent court decisions which have strengthened patents.\n\n94 Journal of Economic Perspectives\n\nAccordingly, innovative firms confront significant challenges in capturing value from new technology. Success in research and development does not automatically translate into a financial success, even if the technology developed meets a significant market need. To succeed financially, innovative firms must quickly position themselves advantageously in the appropriate complementary assets and technologies. If they are not already integrated, the best solution often involves bilateral and multilateral cooperative agreements. $^19$\n\nU.S. antitrust policy, like so much of our economic policy, has been preoccupied with static rather than intertemporal concerns. Despite important recent developments, it is informed by naive theories of the innovation process, and in particular is insensitive to the organizational needs of innovation. U.S. antitrust scholars still harbor suspicion of cooperative agreements among competitors, and do not appreciate the benefits. This suspicion fuels uncertainty about how the courts would view interfirm arrangements to promote technological progress and competition.\n\nThe policy changes we advance are certainly no panacea for the severe problems U.S. high technology industry is currently experiencing. But in bringing American policy closer to Europe and Japan, we will at least purge dogma that no longer deserves a place in U.S. industrial policy. In time, reduced antitrust exposure will help clear the way for beneficial cooperation, thereby reducing incentives for mergers and acquisitions.\n\nThe 1990 centennial of the Sherman Act would be a good occasion to set things right. The economics profession, which in the past has had a significant impact on the law of vertical restraints, can provide the intellectual leadership necessary to propel adjustments in the horizontal area, thereby helping to align U.S. policies with the technological and competitive realities of today's global economy.",
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+      "text": "t on the law of vertical restraints, can provide the intellectual leadership necessary to propel adjustments in the horizontal area, thereby helping to align U.S. policies with the technological and competitive realities of today's global economy.\n\n\u25a0 This paper is based in part on Jorde and Teece (1989a) and Teece (1986). We are extremely grateful for financial support from the Alfred P. Sloan Foundation, the Smith-Richardson Foundation, The Pew Foundation, and the Sasakawa Peace Foundation. We wish to thank Joseph Stiglitz, Carl Shapiro, and Timothy Taylor for valuable substantive and editorial comments. Bill Baxter, Oliver Williamson, and Dick Nelson made helpful comments on earlier drafts and oral presentations. We implicate none of the above in our conclusions.\n\n19 As Richard Nelson (1990) notes, a wide variety of new kinds of organizational arrangements is emerging to support innovation. He predicts, and we concur, that some will succeed, and some will not. Our concern is that because the requirements of innovation are not well understood in mainstream economics and in contemporary antitrust analysis, there is significant danger that the performance of U.S. firms will be impaired by outdated antitrust law.\n\nInnovation and Cooperation: Implications for Competition and Antitrust 95",
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+      "text": "red by outdated antitrust law.\n\nInnovation and Cooperation: Implications for Competition and Antitrust 95\n\n## References\n\nAoki, M., \"Global Competition, Firm Organization, and Total Factor Productivity: A Comparative Micro Perspective.\" Paper presented at the International Seminar on Science, Technology, and Economic Growth, OECD, Paris, June 1989.\n\nArrow, Kenneth J., \"Economic Welfare and the Allocation of Resources for Invention.\" In National Bureau of Economic Research, ed., The Rate and Direction of Inventive Activity. Princeton: Princeton University Press, 1962, pp. 609-625.\n\nChandler, Alfred D. Jr., The Visible Hand: The Managerial Revolution in American Business. Cambridge: Harvard University Press, 1977.\n\nCollis, David, \"The Machine Tool Industry and Industrial Policy, 1955-1982.\" In Spence, A. Michael, and Heather A. Hazard, eds., International Competitiveness. Cambridge: Ballinger, 1988, pp.\n\nDavid, D., \"R&D Consortia,\" High Technology, October 1985, p. 42.\n\nDertouzos, Michael L., Richard K. Lester, and Robert M. Solow, Made in America: Regaining the Productive Edge. Cambridge: MIT Press, 1989.\n\nDosi, Giovanni, \"Sources, Procedures, and Microeconomic Effects of Innovation,\" Journal of Economic Literature, September 1988, 26, 1120-1171.\n\nFair Trade Commission (Japan), Research and Development Activities in Private Enterprises and Problems They Pose in the Competition Policy (Minkan kigyo ni okeru kenkyu kaihatsu katsudo no jitai to kyoso seidaku jo no kaidai), 1984.\n\nGomory, R., \"Dominant Science Does Not Mean Dominant Product,\" Research and Development, November 1987, p. 72.\n\nGrossman, Gene M., and Carl Shapiro, \"Research Joint Ventures: An Antitrust Analysis,\" Journal of Law and Economics, Fall 1986, 2, pp. 315-337.\n\nvon Hippel, Eric, The Sources of Innovation. Cambridge: MIT Press, 1988.\n\nImai, Ken-ichi, and Yasunori Baba, \u201cSystemic Innovation and Cross Border Networks.\u201d Paper presented at Seminar on the Contributions of Science and Technology to Economic Growth, OECD, Paris, June 1989.\n\nIyori, H., and A. Yesugi, The Antimonopoly Laws of Japan, New York: Federal Legal Publications, 2nd edition, 1983.\n\nJorde, Thomas M., and David J. Teece, \"Innovation, Cooperation, and Antitrust: Bal-\n\nancing Competition and Cooperation,\" High Technology Law Journal, Spring 1989a, 4, pp. 1-113.\n\nJorde, Thomas M., and David J. Teece, \"To Keep U.S. in the Chips, Modify the Antitrust Laws,\" Los Angeles Times, July 24, 1989b, Part II, p. 5.",
+      "chunk_id": "00006_W2138453742_coarse_0035",
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+        "References"
+      ],
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+    {
+      "text": "cing Competition and Cooperation,\" High Technology Law Journal, Spring 1989a, 4, pp. 1-113.\n\nJorde, Thomas M., and David J. Teece, \"To Keep U.S. in the Chips, Modify the Antitrust Laws,\" Los Angeles Times, July 24, 1989b, Part II, p. 5.\n\nKline, S. J., and Nathan Rosenberg, \"An Overview of Innovation.\" In Rosenberg, Nathan, and R. Landau, eds., The Positive Sum Strategy. Washington, DC: National Academy Press, 1986, pp. 275-305.\n\nKoopmans, Tjalling, Three Essays in the State of Economic Science. New York: McGraw Hill, 1957.\n\nLevin, Richard, A. Klevorick, R. Nelson, and S. Winter, \"Appropriating the Returns from Industrial Research and Development,\" Brookings Papers on Economic Activity, Winter 1987, 3, 783-820.\n\nMansfield, E., A. Romeo, M. Schwartz, D. Teece, S. Wagner and P. Brach, Technology Transfer, Productivity, and Economic Policy. New York: W. W. Norton, 1982.\n\nNalebuff, Barry, and Joseph Stiglitz, \"Information, Competition and Markets,\" American Economic Review, May 1983, 72, 278-284.\n\nNelson, Richard, \"Capitalism as an Enigma of Progress,\" Research Policy, 1990, 19, 193-214.\n\nOrdover, Janusz, and Robert Willig, \"Antitrust for High Technology Industries: Assessing Research Joint Ventures and Mergers,\" Journal of Law and Economics, May 1985, 28, 311-33.\n\nRosenberg, Nathan, Technology and American Economic Growth. Armonk: M. E. Sharpe, 1972.\n\nSah, Raaj, and Joseph Stiglitz, \u201cTechnological Learning, Social Learning and Technological Change.\u201d In Chakravarty, S., ed., The Balance between Industry and Agriculture in Economic Development. New York: St. Martin's/International Economic Association, 1989, pp. 285\u2013298.\n\nSchumpeter, J. A., Capitalism, Socialism and Democracy. New York: Harper Brothers, 1942.\n\nTeece, David J., \"Technology Transfer by Multinational Firms: The Resource Costs of Transferring Technological Know-how,\" The Economic Journal, June 1977, 87, 242-261.\n\nTeece, David J., \"Economies of Scope and the Scope of the Enterprise,\" Journal of Economic Behavior and Organization, 1980, 1, 223-247.\n\n96 Journal of Economic Perspectives\n\nTeece, David J., \"Towards an Economic Theory of the Multiproduct Firm,\" Journal of Economic Behavior and Organization, 1982, 3, 39-63.\n\nTeece, David J., \"Profiting from Technological Innovation,\" Research Policy, December 1986, 285-305.\n\nTeece, David J., \"Inter-organizational Requirements of the Innovation Process,\" Managerial and Decision Economics, 1989a, 10, 35-42.\n\nTeece, David J., \"Innovation and the Organization of Industry.\" Unpublished working\n\npaper, Center for Research in Management, University of California at Berkeley, 1989b.",
+      "chunk_id": "00006_W2138453742_coarse_0036",
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+      "text": "on Process,\" Managerial and Decision Economics, 1989a, 10, 35-42.\n\nTeece, David J., \"Innovation and the Organization of Industry.\" Unpublished working\n\npaper, Center for Research in Management, University of California at Berkeley, 1989b.\n\nTeece, David J., \"Market Entry Strategies for Innovators: Avoiding Pyrrhic Victories,\" Strategic Management Journal, 1991.\n\nTirole, Jean, The Theory of Industrial Organization. Cambridge: MIT Press, 1988.\n\nWilliamson, Oliver E., The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting. New York: Free Press, 1985.\n\nWinter, Sidney J., \"Knowledge and Competence as Strategic Assets.\" In Teece, David J., ed., The Competitive Challenge. Cambridge: Ballinger, 1987.",
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+      "text": "# Patents and Innovation: Evidence from Economic History\n\nPetra Moser\n\nW hat is the optimal system of intellectual property rights to encourage innovation? In the most basic theoretical models, patents pose a tradeoff between the social benefits from stronger incentives for invention and losses in consumer welfare as a result of monopoly pricing (Nordhaus 1969) . But providing stronger patents for early generations of inventors may also weaken incentives to invest in research and development for later generations (for example, Scotchmer 1991 in this journal), so that the overall effects of stronger patents on innovation are difficult to predict. Negative incentive effects are particularly severe if the boundaries of intellectual property are poorly defined, so that later generations of inventors place themselves at risk of ruinous litigation. Litigation risks are exacerbated when incumbents build \u201c thickets \u201d of strategic patents that cover little innovative progress and instead serve as a legal weapon to protect incumbents' profits (Shapiro 2001; Hall and Ziedonis 2001) . Recent patent wars over smart phones and tablet computers have moved these issues to the forefront of policy debates, but the underlying tensions are substantially more general. Empirical analyses that exploit a wealth of historical datasets and exogenous variation, when done carefully, can help to improve our understanding of these tensions and inform contemporary patent policy.\n\nEmpirical analyses of historical data have emphasized the role of patent laws in creating incentives to invent, promoting innovation, and encouraging economic growth (for example, Khan and Sokoloff 1993; Lamoreaux and Sokoloff 1999; Khan 2005). In the absence of economy-wide data on the quantity of innovations, patent\n\n\u25a0 Petra Moser is a Fellow at the Center for Advanced Studies in the Behavioral Sciences and Assistant Professor of Economics, Stanford University, Stanford, California, and Faculty Research Fellow, National Bureau of Economic Research, Cambridge, Massachusetts.\n\nhttp://dx.doi.org/10.1257/jep.27.1.23.\n\ndoi=10.1257/jep.27.1.23\n\n24 Journal of Economic Perspectives",
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+      "text": "tanford, California, and Faculty Research Fellow, National Bureau of Economic Research, Cambridge, Massachusetts.\n\nhttp://dx.doi.org/10.1257/jep.27.1.23.\n\ndoi=10.1257/jep.27.1.23\n\n24 Journal of Economic Perspectives\n\ncounts have become the standard measure of innovation (for example, Schmookler 1962, 1966; Sokoloff 1988; Moser and Voena 2012), fueled in part by the creation of National Bureau of Economic Research dataset of US patents and citations between 1976 and 2002 (Hall, Jaffe, and Trajtenberg 2001), and more recently by the availability of historical patent data since 1920 through a collaboration between the US Patent and Trademark Office and Google Patents.\n\nPatent data may, however, fail to capture innovation that occurs outside of the patent system \u2014 for example, in countries without patent laws or in industries in which inventors rely on alternative mechanisms to protect their intellectual property. In fact, survey data for the late twentieth century indicate that commercial research and development labs in most industries deem alternative mechanisms, such as secrecy and lead-time (being the first firm to offer a new product) to be more effective than patents (Levin, Klevorick, Nelson, and Winter 1987; Cohen, Nelson, and Walsh 2000) . Historical accounts also indicate that innovation often occurs independently of patents as a result of knowledge sharing (Allen 1983; Nuvolari 2004; Thomson 2009) or cultural attitudes that encourage risk taking (Landes 1969) and scientific experimentation (Mokyr 2009) .",
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+      "text": "ari 2004; Thomson 2009) or cultural attitudes that encourage risk taking (Landes 1969) and scientific experimentation (Mokyr 2009) .\n\nHistorical events \u2014 including a series of prominent technology exhibitions that started with the 1851 Crystal Palace world's fair in London \u2014 have created rich archival records on innovation within and outside of the patent system, which offer opportunities to measure the share and the characteristics of innovations that occur outside of the patent system. Data on exhibits and prizes that international juries awarded to the most innovative exhibits make it possible to examine innovation in countries without patent laws, and thus to exploit a large amount of credibly exogenous variation in patent laws to investigate the effects of patent laws on innovation. Patent laws that were in force in the mid-nineteenth century had largely been adopted ad hoc according to idiosyncratic allegiances of national rulers (Penrose 1951, p. 13) and before interest groups from individual industries had learned to lobby for stronger patents. Scientific breakthroughs that reduced the effectiveness of alternative mechanisms to protect intellectual property created exogenous shifts towards patenting, which make it possible to examine the role that patents play, for example, in the diffusion of ideas. Historical events, such as the creation of the first patent pool in 1856 and the compulsory licensing of enemy-owned US patents as a result of World War I, create opportunities to examine the effects of policies that strengthen or weaken the monopoly power of patents.\n\nTo use historical evidence to guide patent policies today, one must carefully compare historical and modern institutions, political conditions, and changes in the technological characteristics of industries over time. Empirical evidence from economic history, however, can help to inform important policy questions that have proven difficult to answer with modern data. For example, does the existence of strong patent laws encourage innovation? What proportion of innovations is patented? Is this share constant across industries and over time? How does patenting affect the diffusion of knowledge? How effective are prominent mechanisms, such\n\nPetra Moser 25\n\nas patent pools and compulsory licensing, that have been proposed to address problems with the patent system? 1",
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+      "text": "does patenting affect the diffusion of knowledge? How effective are prominent mechanisms, such\n\nPetra Moser 25\n\nas patent pools and compulsory licensing, that have been proposed to address problems with the patent system? 1\n\n## Have Patent Laws Increased the Rate of Innovation?\n\nIn 1474, the Venetian Republic began to offer exclusive rights to inventors and entrepreneurs who had invented or brought new technologies to Venice. Intended to attract skilled artisans, the Republic's rudimentary patent system was copied by other European rulers to promote economic development and, more frequently, to reward political and financial support (David 1994, p. 134; Boldrin and Levin 2008, p. 43\u201344). In 1623, Britain's Statute of Monopolies transferred the right of granting monopolies from King James I to Parliament. North and Thomas (1973) argue that this shift, which replaced a royal prerogative to sell monopolies by a legal property rights in ideas, played a critical role in encouraging Britain's Industrial Revolution. The first article of the US Constitution instructed Congress to \u201cpromote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.\u201d This provision established the foundation for the world's first modern patent system, which Khan and Sokoloff (1998, 2001) argue was instrumental in encouraging technological progress and economic growth in the United States.\n\nRecent interpretations, however, contend that patents played no major role in encouraging technological development and economic growth during Britain\u2019s Industrial Revolution (Clark 2006; Mokyr 2009; Allen 2009). Mokyr (2009), for example, emphasizes the importance of a shift towards science-based experimentation during the Enlightenment in setting the stage for Europe\u2019s Industrial Revolution. Alternative accounts of US innovation have emphasized the importance of relative factor prices, and in particular, the high costs of labor relative to the abundance of natural resources, as an impetus for mechanization, and for the development of a specifically American system of manufacturing (Rothbarth 1946; Habbakuk 1962; Rosenberg 1963, 1969, 1972; Hounshell 1985).",
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+      "text": "natural resources, as an impetus for mechanization, and for the development of a specifically American system of manufacturing (Rothbarth 1946; Habbakuk 1962; Rosenberg 1963, 1969, 1972; Hounshell 1985).\n\nHistorical variation in patent laws in the nineteenth century\u2014when some countries had not yet adopted patent laws while other abolished them for political reasons\u2014offers unique opportunities to investigate the effects of patent laws on innovation. Switzerland, for example, had no patents until the country adopted a rudimentary patent system in 1888 and switched towards a full-fledged system in 1907 (Schiff 1971). Denmark provided limited patent protection for up to five years\n\n1 In addition to patents, innovation policy includes other types of intellectual property rights, such as copyrights, which protect books, music, and software. National governments have also begun to increasingly use prizes as an alternative mechanism to encourage innovation. More generally, the ability to attract high-skilled scientists and workers is likely to be a key factor in determining rates of innovation. Economic history also offers rich opportunities to explore the effectiveness of these alternative mechanisms (see for example Li, MacGarvie, and Moser 2012; Moser, Voena, and Waldinger 2011; Moser and Nicholas 2012).\n\n26 Journal of Economic Perspectives\n\nin 1874, but waited until 1894 to enact an official patent law (Agnew 1874, p. 430; Boult 1895, p. 136). The Netherlands abolished its patent system in 1869 after a political victory of the free trade movement, which reflected a common view of patents as a form of protectionism and rejected them as a restriction on trade (Schiff 1971). Even for countries with patent laws, the strength of patents was far from uniform. In 1876, for example, patents in Denmark and Greece expired after five years, while patents in other countries lasted for a minimum of twelve years (Lerner 2000). Inventors around the world were also heavily dependent on domestic patent laws because patenting abroad was prohibitively expensive and \u2014 until the Paris Convention of 1883 \u2014 national patent systems discriminated heavily against foreign patentees (Bilir, Moser, and Talis 2011).",
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+      "text": "s because patenting abroad was prohibitively expensive and \u2014 until the Paris Convention of 1883 \u2014 national patent systems discriminated heavily against foreign patentees (Bilir, Moser, and Talis 2011).\n\nAnalyses of technologies that were exhibited at nineteenth-century world's fairs exploit such variation to examine differences in innovation for countries with and without patent laws. Exhibition catalogues, which guided visitors through the vast grounds of nineteenth- and early twentieth-century technology fairs, list all exhibits. Collecting these data and matching them with reports on prize-winning innovations, as well as with patent data and with geographic information, makes it possible to examine the number and the characteristics of innovations that occurred inside and outside of the patent system, which has been difficult to accomplish using patent counts as the standard indicator of innovation.\n\nExhibition data are available for the Crystal Palace Exhibition in London in 1851, the American Centennial Exhibition in Philadelphia in 1876, the World's Columbian Exhibition in Chicago in 1893, and the Panama-Pacific International Exposition in San Francisco in 1915. In 1851, the Crystal Palace, a 1,848-foot long greenhouse of cast iron and glass, was the largest enclosed space on earth; it housed 17,062 exhibitors from 40 countries. At a time when London had fewer than two million inhabitants, more than six million entry tickets were sold for the Crystal Palace. In 1876, visitors at the US Centennial Exhibition would have had to walk more than the distance of a marathon to see 30,864 exhibitors from 35 countries; almost ten million people visited the fair (Kroker 1975, p. 146). In 1893, the World's Columbian Exposition covered 717 acres of land and water in Jackson Park by Lake Michigan; it attracted 27.5 million visitors. In 1915, San Francisco's Marina and Presidio was converted to a fairground; it welcomed 30,000 exhibitors from 32 countries and 19 million visitors.",
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+      "text": "ttracted 27.5 million visitors. In 1915, San Francisco's Marina and Presidio was converted to a fairground; it welcomed 30,000 exhibitors from 32 countries and 19 million visitors.\n\nAnalyses of the 1851 and 1876 exhibits reveal a perhaps surprising amount of high-quality innovations in countries without patent laws. In 1851, Switzerland and Denmark contributed 110 exhibits per million people, compared with a mean of 55 and a median of 36 per million people for all countries (Moser 2005). Swiss exhibits were also more likely to win prizes for exceptional novelty and usefulness. In 1851, 43 percent of Swiss exhibits won a prize, compared with a mean of 35 percent and a median of 33 percent for all countries. In 1876, Switzerland contributed 168 exhibits per million in population, compared with a mean of 87 and a median of 61 for all countries (Moser and Zimring 2012). The Netherlands \u2014 which had abolished patents in 1869 \u2014 won more prizes per\n\nPatents and Innovation: Evidence from Economic History 27\n\nexhibit than any other country, with 86 percent, compared with a mean of 46 and a median of 45 percent for all countries.\n\nThe world's fair data also indicate that only a small share of innovations were patented, calling into question the role of intellectual property rights in encouraging Britain's Industrial Revolution. In 1851, 11 percent of British exhibits were patented. These results are consistent with historical accounts, which emphasize the importance of cultural factors (Clark 2006; Mokyr 2009) as well as systems of collective invention without patents. For example, improvements in Cornish steam engines (Nuvolari 2004) and in blast furnaces in Cleveland's iron industry in the United Kingdom were shared freely within a system of collective invention (Allen 1983) in which patenting was rare. $^2$\n\nData on prize-winning British exhibits help to shed light on the interaction between the quality of inventions and inventors' decision to use patents. Existing theoretical models indicate that firms may decide to keep important innovations secret because patents require disclosure, which is risky if patents are ineffective at blocking competitors from using a patented invention (Anton and Yao 2004; Horstmann, MacDonald, and Slivinski 1985) . Exhibition data, however, indicate that high-quality innovations are slightly more likely to be patented: In 1851, 15 percent of British exhibits that won prizes for exceptional usefulness and quality were patented, compared with 11 percent of average-quality exhibits.",
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+      "text": "e that high-quality innovations are slightly more likely to be patented: In 1851, 15 percent of British exhibits that won prizes for exceptional usefulness and quality were patented, compared with 11 percent of average-quality exhibits.\n\nExhibition data on the share of innovations without patents make it possible to examine how the characteristics of patent institutions influence inventors' use of patents. Khan and Sokoloff (1998, 2001, in this journal) have credited the design and low costs of patenting under the US system with encouraging technical progress and economic growth through the \u201cdemocratization\u201d of invention. In the mid nineteenth century, British inventors faced a drawn-out and expensive process, with exorbitant legal fees and bribes (MacLeod 1988, p. 76) in addition to official fees of $ 37,000 (in 2000 US dollars, Lerner 2000). $^3$ By comparison, US inventors could mail in their applications and paid only $ 618 in fees (in 2000 US dollars, Lerner 2000). Patenting rates, however, were only slightly higher for US compared with British exhibits\u2014at 15 compared with 11 percent (Moser 2012, p. 54).\n\nUS courts have also always been more likely to uphold the patent rights of early generations of inventors, while British courts tended to be more anti-patent (Dutton 1984; Khan 2005). This pro-patent bias may, however, have discouraged US rates of innovation as early as the mid nineteenth century, anticipating problems with the current system (Bessen and Meurer 2008). In 1846, for example, the US Patent and Trademark Office issued patent 4,750 to Elias Howe for an Improvement in Sewing Machines. Howe's patent was broad enough to cover most commercially viable\n\n2 Inventions within systems of collective invention were predominantly incremental (or micro-, rather than macro-inventions, Mokyr 1990), which Landes (1969, p. 92) argues \"were probably more important in the long run than the major inventions that have been remembered in history books.\"\n\n3 Reforms of the British and other European patent systems during the \"Patent Controversy\" (1855\u20131873) may have been triggered by the Crystal Palace exhibition and the unexpected quality of US innovations (Machlup and Penrose 1950; Rosenberg 1969, p. 2).\n\n28 Journal of Economic Perspectives",
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+      "text": "y\" (1855\u20131873) may have been triggered by the Crystal Palace exhibition and the unexpected quality of US innovations (Machlup and Penrose 1950; Rosenberg 1969, p. 2).\n\n28 Journal of Economic Perspectives\n\nsewing machines at the time. Like a twenty-first century \u201cpatent troll,\u201d Howe used his patent to threaten litigation instead of commercializing his invention. In 1852, a District Court upheld Howe\u2019s patent, and he began to collect license fees of $25 per machine, roughly one-fifth the average price of a sewing machine (Lampe and Moser 2012b). Then other firms sued based on their own patents, and production came to a near halt in the 1851\u20131856 \u201csewing machine wars\u201d (Bissell 1999, p. 84). By 1867, Howe had received $2 million in license fees (Parton 1867) roughly $27.8 million in 2011 dollars (converted using the GDP deflator, based on data from Officer and Williamson 2011).",
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+      "text": "g the GDP deflator, based on data from Officer and Williamson 2011).\n\n## Did the Creation of Plant Patents in 1930 Encourage Innovation?\n\nThroughout the early twentieth century, living organisms such as livestock, bacteria, and plants could not be patented. After World War I, however, concerns about food security motivated the creation of intellectual property rights for plants that propagate asexually (through roots rather than seeds) in the US Plant Patent Act of 1930. Breeders of food crops had argued that, in the absence of effective alternative mechanisms, they were heavily dependent on patent rights to recover large development costs. The Stark Brothers Nursery, for example, had built a large cage, armed with a burglar alarm, to prevent competitors from stealing cuttings of the first Golden Delicious apple tree, as shown in Figure 1. By creating plant patents, Congress hoped to encourage domestic innovation and the development of a domestic US plant breeding industry.\n\nNearly half of all US plant patents between 1930 and 1970, however, were for roses, suggesting that the 1930 legislation may have missed its target of establishing food security (Moser and Rhode 2012, pp. 418\u2013420). Anecdotal evidence indicates that the creation of plant patents may have facilitated the development of a research-based US rose breeding industry. Similar to pharmaceutical research and development today, it took up to twelve years to develop a new rose, and fewer than one in 1,000 seedlings typically proved commercially successful (Robb 1964, p. 389; Stewart 2007, p. 131). Once a new rose had been developed, it was easy for competitors to copy and propagate through cuttings, so that original breeders could not rely on secrecy or being first to recuperate their costs of research and development. Until World War II, US nurseries had depended on imported nursery stock from Europe, but in the 1940s, roughly a decade after the Plant Patent Act, commercial nurseries, which account for the majority of plant patents, began to build mass hybridization programs for roses.",
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+      "text": "from Europe, but in the 1940s, roughly a decade after the Plant Patent Act, commercial nurseries, which account for the majority of plant patents, began to build mass hybridization programs for roses.\n\nData on registrations of newly created roses between 1916 and 1970, as an alternative measure of innovation, however, suggest that the effect of plant patents was limited. Registration data suggest that US breeders created fewer new roses after 1931. Moreover, less than 20 percent of new rose varieties registered after 1930 were patented (Moser and Rhode 2012, pp. 429\u2013434). In fact, information on lineage indicates that most roses that are commercially successful today descended from\n\nPetra Moser 29\n\nFigure 1\n\nA Cage that Stark Brothers Nursery Built around Its Golden Delicious Apple Tree\n\n![Figure](figures/figure_002.png)\n\nSource: Image from Rossman (1930, p. 395), reproduced in Moser and Rhode (2012, p. 415). Note: The cage was built around the Stark Brother's Golden Delicious tree to prevent competitors from stealing shoots of the tree; it was equipped with an alarm.\n\nthe breeding efforts of public sector plant scientists that preceded the creation of plant patents. Furthermore, historical records suggest that the US rose industry received a boost when World War II cut off rose supplies from European competitors and US breeders began to produce their own nursery stock based on licensed European roses.",
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+      "text": "plies from European competitors and US breeders began to produce their own nursery stock based on licensed European roses.\n\n## Patents, Secrecy, and the Direction of Technical Change\n\nExhibition data also indicate that the share of innovations that inventors chose to patent varied strongly across industries. For example, fewer than 5 percent of Britain's chemical exhibits in 1851, 10 percent of scientific instruments, and 8 percent of exhibits in food processing were patented, compared with 20 percent of manufacturing machinery (Moser 2012). Remarkably, US and British inventors appear to have relied on patents\u2014and avoided patents\u2014in the same industries despite vast differences between the British and the American patent system. Historical accounts suggest that variation in the effectiveness of secrecy, as an alternative\n\n30 Journal of Economic Perspectives\n\nto patents, was instrumental in determining variation in the use of patents. Secrecy was an effective mechanism to protect mid-nineteenth-century improvements in chemicals because science had not yet evolved enough to allow competitors to reverse engineer them. Given the crude analytical tools of the time, valuable dyes such as indigo and madder red proved impervious to industrial espionage until the late nineteenth century (Haber 1958, p. 83). Secrecy was also effective in protecting improvements in the production of scientific instruments, such as the rectangular prisms of Swiss glassmaker T. Daguet of Soleure and the optical instruments of Danish makers (Berichterstattungs-Kommission, vol 1, 1853, pp. 813\u201319, 930\u201341). Watchmakers in the Swiss Valle\u00e9 de Joux maintained tight secrecy surrounding an improved mechanism to measure minutes by agreeing not to take apprentices between 1823 and 1840 ( Jaquet and Chapuis 1945, p. 165).\n\nBut if inventors' dependence on patents varies across industries, patent laws may influence the direction of technical change (Moser 2005) : In countries without patent laws, inventors depend entirely on secrecy, lead time, and other alternatives to patents in protecting their intellectual property. As a result, investments in research and development may be most attractive in industries in which secrecy can effectively guarantee exclusive rights long enough to allow inventors to recoup their investments. In countries with patent laws, inventors can use legal protection to establish exclusivity in any industry, so factors other than the effectiveness of secrecy determine the direction of technical change.",
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+      "text": "ventors to recoup their investments. In countries with patent laws, inventors can use legal protection to establish exclusivity in any industry, so factors other than the effectiveness of secrecy determine the direction of technical change.\n\nCross-country comparisons of exhibition data confirm that innovation in countries without patent laws focused on a narrow set of industries in which secrecy was effective. At the Crystal Palace, one-fourth of exhibits from countries without patent laws were scientific instruments, compared with one-seventh of exhibits from other countries (Moser 2005). Countries without patent laws also had larger shares of innovations in textiles, especially dyes, and in food processing.\n\nIn food processing, the history of margarine illustrates the effectiveness of secrecy relative to patents. The French chemist M\u00e8ge Mouri\u00e8s, for example, believed his invention to be protected by a patent, and disclosed the process of producing margarine from suet to two Dutch entrepreneurs, Jurgens and van den Bergh. Jurgens and van den Bergh began to manufacture margarine in 1871\u2014two years after the Netherlands had abolished patent laws in response to a victory of the freetrade movement. After a falling out, van den Bergh kept his improvements secret, and Jurgens was unable to reverse engineer the superior taste of van den Bergh margarine (which allowed for its commercialization) until 1905 (Schiff 1971).\n\nMore generally, the share of Dutch innovations in food processing experienced a marked increase after the Netherlands abolished patents in 1869. In 1851, 11 percent of exhibits from the Netherlands were related to food processing. In 1876, 37 percent of Dutch exhibits, including a disproportionate amount of awardwinners, originated from this industry (Moser 2005). Many other innovations in the field, including milk chocolate, baby foods, and ready-made soups, were made in Switzerland and the Netherlands when neither country offered patents (Schiff 1971, pp. 52\u201358).\n\nPatents and Innovation: Evidence from Economic History 31",
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+      "text": "ady-made soups, were made in Switzerland and the Netherlands when neither country offered patents (Schiff 1971, pp. 52\u201358).\n\nPatents and Innovation: Evidence from Economic History 31\n\nSurvey data from the late twentieth century indicate that the relative effectiveness of secrecy and patents continued to vary strongly across industries. For example, respondents from 634 American research and development labs in 1983 (Levin, Klevorick, Nelson, and Winter 1987) and from 1,478 American firms in 1994 (Cohen, Nelson, and Walsh 2000) report that secrecy is more effective than patents as a mechanism to protect intellectual property in most industries. Harhoff and Hoisl (2006) present comparable evidence for European countries. Only for pharmaceuticals and chemical inventions are patents consistently rated as an effective mechanism to protect intellectual property today. Compared with midnineteenth-century reports, which emphasize the effectiveness of secrecy to protect chemical inventions, these results indicate that the effectiveness of secrecy varies not only across industries, but also over time.\n\nScientific breakthroughs, which lowered the effectiveness of secrecy, may be one important factor that determines inventors' propensity to patent. In chemicals, for example, analytical advances such as August Kekul\u00e9's model of the benzene ring in 1865 and Dmitrii Mendeleev's publication of the periodic table in 1869, transformed chemical analysis in the second half of the nineteenth century. As a result of these advances, it became much riskier to protect chemicals through secrecy (Haber 1958, p. 81). At the same time, these analytical advances had no effects on innovations in machinery, which had always been easy to copy.\n\nIn Moser (2012) , I exploit this differential shift to examine the effects of exogenous changes in the effectiveness of secrecy on inventors' propensity to patent. Difference-in-differences comparisons reveal a significant shift towards patenting in response to analytical advances: In 1851 and 1876, 0 and 5 percent of US chemical innovations were patented, respectively. In 1893 and 1915, 19 and 20 percent of US chemical innovations were patented, respectively. During the same time, patenting rates in manufacturing machinery \u2014 an industry in which secrecy was always ineffective \u2014 stayed roughly constant between 44 and 49 percent (Moser 2012, pp. 62\u201367). These results suggest that scientific breakthroughs, such as the publication of the periodic table in the nineteenth century or the decoding of the human genome today, may not only affect the speed of innovation but also increase inventors' dependency on patents.",
+      "chunk_id": "00008_W3125878831_coarse_0013",
+      "chunk_type": "coarse",
+      "paper_id": "00008_W3125878831",
+      "paper_title": "Patents and Innovation: Evidence from\nEconomic History",
+      "section_hierarchy": [
+        "Patents and Innovation: Evidence from Economic History",
+        "Patents, Secrecy, and the Direction of Technical Change"
+      ],
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+    },
+    {
+      "text": "uggest that scientific breakthroughs, such as the publication of the periodic table in the nineteenth century or the decoding of the human genome today, may not only affect the speed of innovation but also increase inventors' dependency on patents.\n\n## Patent Laws and the Diffusion of Innovation\n\nThis science-driven shift towards patenting makes it possible to explore whether patent rights encourage the geographic diffusion of innovative activity, which in turn has important consequences for cumulative innovation and economic growth. Analyses of patent laws typically focus on incentive effects and have largely ignored diffusion, even though disclosure and teaching a new set of firms about the \u201cmysteries\u201d of more advanced technologies was an important goal of early patent systems (David 1994). In fact patents are often considered as a mechanism\n\n32 Journal of Economic Perspectives\n\nto prevent rather than encourage the diffusion of patented ideas. As Abramovitz (1989, pp. 39\u201340) wrote:\n\n[T]here is a need to balance the potential private rewards of innovation, which are the incentive for private investment, against the social interest in spreading knowledge and encouraging its widespread and rapid commercial application. The first element calls for protecting the private investor in an exclusive right to exploit the new knowledge he has gained. The second calls for limiting that exclusive privilege to permit diffusion and to support the competitive investments of rivals.\n\nLamoreaux and Sokoloff (1999) , however, link the increase in US patenting in the late nineteenth century with the emergence of professional patent agents, whose role was to facilitate the trade in patented ideas. The case of M\u00e8ge Mouri\u00e8s (the unfortunate inventor of margarine) suggests that inventors may be more willing to disclose technical information to competitors if they feel protected by a patent. In another example from early nineteenth-century England, the UK iron founder Robert Ransome began to advertise his plough-shares to all ironmongers in Norwich and 50 outlets in East Anglia after he received a patent in 1803 (MacLeod 1988, p. 100) . By contrast, inventors have fiercely guarded knowledge from spreading to people outside their social network in the absence of intellectual property. For example, silk weavers in seventeenth-century Bologna hanged Ugolino Menzani for sharing the knowledge of a new silk twisting machine with Venetian weavers (Belfanti 2004, p. 581) , and mechanics in the nineteenth-century Pennsylvania cotton industry relied on family relations to exchange technical knowledge (Wallace 1986, pp. 211\u201346) .",
+      "chunk_id": "00008_W3125878831_coarse_0014",
+      "chunk_type": "coarse",
+      "paper_id": "00008_W3125878831",
+      "paper_title": "Patents and Innovation: Evidence from\nEconomic History",
+      "section_hierarchy": [
+        "Patents and Innovation: Evidence from Economic History",
+        "Patent Laws and the Diffusion of Innovation"
+      ],
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+    {
+      "text": "dge of a new silk twisting machine with Venetian weavers (Belfanti 2004, p. 581) , and mechanics in the nineteenth-century Pennsylvania cotton industry relied on family relations to exchange technical knowledge (Wallace 1986, pp. 211\u201346) .\n\nIn Moser (2011) , I exploit the shift towards patenting in the nineteenth-century chemicals industry to explore whether patenting may, in fact encourage the diffusion of innovative activity: by creating intellectual property rights in ideas, patents may encourage inventors to disseminate knowledge of patented inventions, which in turn facilitates cumulative innovation and learning by doing. $^4$ A geographic analysis of exhibition data confirms that the shift towards patenting in chemicals was followed by a significant weakening in the geographic localization of inventive activity in chemicals. This decline in geographic concentration cannot be explained by changes in the localization of production; data from decennial census records for 1840 to 1920 indicate that the localization of chemical production remained relatively stable after 1876. Measuring changes in the diffusion of innovations by a geographic Herfindahl\u2013Hirschmann index and using 1876 as a baseline, geographic concentration decreased by more than 70 percent for chemicals after 1876, compared with roughly 25 percent for manufacturing machinery. Differencein-differences regressions, which compare changes after 1876 in the geographic\n\n$^{4}$ See Scotchmer (1991) for a survey of the literature on cumulative innovation.\n\nPetra Moser 33\n\nconcentration of innovations in chemicals and manufacturing machinery, indicate that a 1 percent increase in the share of patented innovations was associated with a 1.3 percent decrease in localization.\n\nThus, the sum of the historical evidence from exhibition data, plant patents, and other sources indicates that patent laws may influence the direction of technological change and help to encourage the diffusion of knowledge, even though patent laws do not appear to be a necessary or sufficient condition for higher rates of innovation.",
+      "chunk_id": "00008_W3125878831_coarse_0015",
+      "chunk_type": "coarse",
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+      "paper_title": "Patents and Innovation: Evidence from\nEconomic History",
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+        "Patents and Innovation: Evidence from Economic History",
+        "Patent Laws and the Diffusion of Innovation"
+      ],
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+    },
+    {
+      "text": "of technological change and help to encourage the diffusion of knowledge, even though patent laws do not appear to be a necessary or sufficient condition for higher rates of innovation.\n\n## Mechanisms to Modify Patent Laws: Patent Pools\n\nHow can economic policy modify existing patent systems to make them more effective? A major problem with any patent system lies in the difficulty of defining the boundaries of the technology space that is covered by a patent. As a result, patent examiners may issue patents that cover overlapping areas of the technology space, such that two or more firms own blocking patents for the same technology. This in turn leads to infringement litigation, which impedes the production of new technologies and may discourage innovation.\n\nPatent pools, which allow a group of firms to combine their patents, have emerged as a prominent mechanism to resolve blocking patents and prevent or resolve patent wars. In the 1990s, four pools formed in the information technology industry: the MPEG-2 pool, the 3G platform, and two DVD pools (Merges 2001). More recently, Google launched an open-source video format pool to counter MPEG LA's pool for the H.264 video coding standard, and MPEG LA has announced plans for a pool to cover kits for diagnostic genetic testing.\n\nAlthough patent pools may weaken the intensity of competition, as they allow a group of firms to combine their individually held patents, regulators and courts have allowed pools, arguing, \u201cIn a case involving blocking patents, such an arrangement is the only reasonable method for making the invention available to the public\u201d ( International Mfg. Co. v. Landon , 336 F.2d 723, 729 [9th Cir. 1964]). Another argument in favor of pools is that, at least in theory, pools that combine complementary patents may reduce license fees for outside firms as they eliminate \u201cn-marginalization,\u201d which occurs when firms that own patents for parts of a product charge license fees that are too high compared with the profit-maximizing fee for the complete product (Lerner and Tirole 2004; Shapiro 2001, p. 134).",
+      "chunk_id": "00008_W3125878831_coarse_0016",
+      "chunk_type": "coarse",
+      "paper_id": "00008_W3125878831",
+      "paper_title": "Patents and Innovation: Evidence from\nEconomic History",
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+        "Patents and Innovation: Evidence from Economic History",
+        "Mechanisms to Modify Patent Laws: Patent Pools"
+      ],
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+    },
+    {
+      "text": "that own patents for parts of a product charge license fees that are too high compared with the profit-maximizing fee for the complete product (Lerner and Tirole 2004; Shapiro 2001, p. 134).\n\nThis positive view of patent pools is consistent with the early history of a pool that formed in the US aircraft industry to encourage the production of planes during World War I. In 1917, patent litigation between the Orville and Wilbur Wright Company and their competitor, the Curtiss Company, had brought the US production of planes to a halt. A committee under Franklin Roosevelt, then Assistant Secretary of the Navy, recommended that Wright and Curtiss form a patent pool. After the pool had formed, US output of aircraft increased from 83 in 1916 to 11,950 in 1918 (Bittlingmayer 1988; Stubbs 2002). The aircraft pool remained in\n\n34 Journal of Economic Perspectives\n\neffect until 1975, when the US Department of Justice decided to dissolve the pool, arguing that it had \u201c lessened competition in research and development \u201d ( Federal Register 40(142), July 23, 1975, p. 30848). This decision exemplifies the tension between the potential benefits and costs of patent pools.\n\nIn theoretical models, the predicted effects of patent pools on innovation are ambiguous. The prospect of a pool may motivate firms to enter a race to patent the technologies that will form the pool; this race could be productive, or it may be socially wasteful if it encourages duplicative research and strategic patenting (Dequiedt and Versaevel 2012) . The creation of a pool may also encourage investments in research and development by reducing litigation risks for members and thereby increasing expected profits from research and development (Shapiro 2001) , but it may also lead pool members to cut their own investments in research and development because they hope to be able to free-ride on the investments of other members (Vaughn 1956, p. 67) . Incentives to free-ride are particularly strong for pools that include \u201cgrant-back provisions,\u201d which require members to offer all new patents to the pool, and innovative members may abandon the pool to protect their patents (Aoki and Nagaoka 2004) . Grant-back provisions may, however, also encourage innovation by reducing the potential for hold-up (Lerner, Strojwas, and Tirole 2007) .",
+      "chunk_id": "00008_W3125878831_coarse_0017",
+      "chunk_type": "coarse",
+      "paper_id": "00008_W3125878831",
+      "paper_title": "Patents and Innovation: Evidence from\nEconomic History",
+      "section_hierarchy": [
+        "Patents and Innovation: Evidence from Economic History",
+        "Mechanisms to Modify Patent Laws: Patent Pools"
+      ],
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+      "chunk_index": 17,
+      "total_chunks": 34,
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+    },
+    {
+      "text": "rs may abandon the pool to protect their patents (Aoki and Nagaoka 2004) . Grant-back provisions may, however, also encourage innovation by reducing the potential for hold-up (Lerner, Strojwas, and Tirole 2007) .\n\nEmpirical evidence on the effects of modern pools on innovation is limited so far. Qualitative evidence indicates that innovation increased in response to a pool for CDs, but declined in response to a pool for disk drives (Flamm 2012). In the open source software industry, the creation of a pool was followed by a modest increase in the number of new open source software products per year for technology fields in which IBM contributed patents to the pool (Ceccagnoli, Forman, and Wen 2012). $^5$\n\nEconomic history offers opportunities to investigate pools across a broad range of industries and regulatory settings (Gilbert 2004) , starting with the first pool in US history, the Sewing Machine Combination (1856\u20131877) . This pool shared key characteristics of pools that are predicted to encourage innovation today: It combined nine complementary patents, which were necessary to build a commercially viable sewing machine, and it resolved the sewing machine patent war between Elias Howe, the Singer Company, and two other manufacturers, which had delayed commercialization. Litigation data confirm that the creation of a pool lowered litigation risks for members (Lampe and Moser 2010, p. 900) . The pool also reduced license fees from $ 25 for Howe's patent to $ 5 for the bundle of patents for members and $ 15 for outside firms, confirming theoretical predictions.\n\nPatenting, however, declined after the pool formed and only increased again after the pool dissolved in 1877 (Lampe and Moser 2010, p. 913) . A comparison with the British sewing machine industry, which had no patent pool, suggests that\n\n5 Earlier empirical analyses have focused on the determinants of pool participation (Layne\u2013Farrar and Lerner 2010) and on rules that govern interactions between pool members (Lerner, Strojwas, and Tirole 2007) .\n\nPatents and Innovation: Evidence from Economic History 35\n\nFigure 2\n\nShare of Sewing Machine Patents in All Patents: United States versus Britain\n\n![Figure](figures/figure_002.png)\n\nSource: Lampe and Moser (2010). Notes: US patents granted in USPTO main class 112 (\"sewing\") and British patents from A Cradle of Inventions: British Patents from 1617 to 1894. Series excludes patents for attachments, tables, and stands.\n\nthis decline in innovation was a purely American phenomenon, as we can see in Figure 2 . In Britain, sewing machine patents continued to increase gradually as a share of all British patents until the early 1874 and experienced no increase after 1877.",
+      "chunk_id": "00008_W3125878831_coarse_0018",
+      "chunk_type": "coarse",
+      "paper_id": "00008_W3125878831",
+      "paper_title": "Patents and Innovation: Evidence from\nEconomic History",
+      "section_hierarchy": [
+        "Patents and Innovation: Evidence from Economic History",
+        "Mechanisms to Modify Patent Laws: Patent Pools"
+      ],
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+    },
+    {
+      "text": "his decline in innovation was a purely American phenomenon, as we can see in Figure 2 . In Britain, sewing machine patents continued to increase gradually as a share of all British patents until the early 1874 and experienced no increase after 1877.\n\nTo investigate whether this decline in patenting reflected a decline in innovation, we collected additional data on objective improvements in the performance of sewing machines. Articles on sewing machines in nineteenth-century magazines, such as the Scientific American and the Ladies' Home Journal suggest that the key characteristics that consumers valued in a sewing machine were low weight, little noise, and most importantly, a high speed of sewing, measured as the number of stitches per minute that a machine could perform. Data on improvements in sewing speed, which we collected from company records and trade journals in the Smithsonian Institution Library, and shown in Figure 3 , indicate that improvements slowed soon after the pool had been established and did not recover until it had dissolved (Lampe and Moser 2010, pp. 916\u201317).\n\nWhether these results are generalizable to other industries and modern pools is an open question. The unambiguous decline in innovation for sewing machines, however, highlights the need for additional empirical \u2014 and theoretical \u2014 analyses to guide antitrust policy towards pools. Theoretical models of effects on price are\n\n36 Journal of Economic Perspectives\n\nFigure 3\n\nStitches per Minute\n\n![Figure](figures/figure_002.png)\n\nSources: Figure from Lampe and Moser (2010) . Data from the Scientific American (1846\u20131869), exhibition catalogues, such as the \u201cUnited States Commissioners Report to the Universal Exposition in Paris,\u201d \u201cThe Report of the Twenty-seventh Exhibition of American Manufactures, Held in the City of Philadelphia,\u201d ads in contemporary trade publications, including \u201cThe Textile American;\u201d and historical industry analysis, such as Uniting the Tailors: Trade Unionism amongst the Tailoring Workers of London and Leeds, 1870\u20131939. Notes: Figure 3 plots improvements in sewing speed based on data collected from company records and trade journals in the Smithsonian Institution Library. The solid line plots a fourth-order polynomial trend.",
+      "chunk_id": "00008_W3125878831_coarse_0019",
+      "chunk_type": "coarse",
+      "paper_id": "00008_W3125878831",
+      "paper_title": "Patents and Innovation: Evidence from\nEconomic History",
+      "section_hierarchy": [
+        "Patents and Innovation: Evidence from Economic History",
+        "Mechanisms to Modify Patent Laws: Patent Pools"
+      ],
+      "char_start": 30955,
+      "char_end": 33213,
+      "chunk_index": 19,
+      "total_chunks": 34,
+      "overlap_with_previous": true
+    },
+    {
+      "text": "igure 3 plots improvements in sewing speed based on data collected from company records and trade journals in the Smithsonian Institution Library. The solid line plots a fourth-order polynomial trend.\n\nwell developed (Shapiro 2001; Lerner and Tirole 2004) , but effects of patent pools on innovation are equally important and less well understood. Existing theoretical models also focus almost exclusively on member firms, but ignore effects on outside firms. Patent data, however, indicate that outside firms produced the large majority of patents across industries (Lampe and Moser 2012a) , suggesting that their response to the creation of a pool is essential to understanding the welfare effects of pools.\n\nA better understanding of the mechanism by which pools influence the rate and direction of innovation is particularly important as the use of pools expands into innovative research fields with high social value, such as biochemistry, medicines, or energy. The case of the sewing machine industry suggests that the creation of a pool may soften the intensity of competition for member firms, which tend to be larger and more established, at the expense of outside firms, which tend to be smaller and younger than pool members. For example, the sewing machine pool appears to have exacerbated litigation risks for outside firms, even as it reduced\n\nPetra Moser 37\n\nsuch risks for members (Lampe and Moser 2010, p. 907) . The pool also created differential license fees that favored pool members, even though it reduced license fees (as theory predicts). Current antitrust guidelines allow pools to charge differential license fees, unless they have been shown to have direct anticompetitive effects. The experience of the sewing machine pool, however, indicates that differential license fees \u2014 which make it harder for outside firms to offer the pool technology at a competitive price \u2014 diverted the research investments of outside firms towards technologically inferior substitutes for the pool technologies (Lampe and Moser 2012b) . This finding suggests that \u2014 in the absence of effective regulation \u2014 patent pools may influence not only levels, but also the direction of technical change.",
+      "chunk_id": "00008_W3125878831_coarse_0020",
+      "chunk_type": "coarse",
+      "paper_id": "00008_W3125878831",
+      "paper_title": "Patents and Innovation: Evidence from\nEconomic History",
+      "section_hierarchy": [
+        "Patents and Innovation: Evidence from Economic History",
+        "Mechanisms to Modify Patent Laws: Patent Pools"
+      ],
+      "char_start": 30955,
+      "char_end": 33157,
+      "chunk_index": 20,
+      "total_chunks": 34,
+      "overlap_with_previous": true
+    },
+    {
+      "text": "ool technologies (Lampe and Moser 2012b) . This finding suggests that \u2014 in the absence of effective regulation \u2014 patent pools may influence not only levels, but also the direction of technical change.\n\n## Compulsory Licensing\n\nAn alternative mechanism to modify patent systems is compulsory licensing, which weakens the monopoly power of patents by licensing them to competing firms without the consent of patent owners. This policy has moved to the forefront of international trade debates, as international treaties, such as the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) have strengthened foreign-owned patents in developing countries, reducing access to life-saving drugs and other essential innovations (Deardorff 1992; Grossman and Lai 2004; Chaudhuri, Goldberg, and Jia 2006). To address this issue, Article 31 of TRIPS allows national governments to issue compulsory licenses of foreign-owned patents in cases of national emergencies. The World Trade Organization Doha Declaration of 2001 (WT/MIN(01)/DEC/1, Art. 5.b) further specifies that national governments have \u201cthe freedom to determine the grounds upon which such licenses are granted.\u201d Thailand and Brazil, for example, have used compulsory licensing to procure antiretroviral drugs for millions of patients with HIV/AIDS, and India has used the threat of compulsory licensing to procure vaccines for swine flu (Kremer 2002; Galv\u00e3o 2002; Gostin 2006; Steinbrook 2007).\n\nImmediate access to foreign-owned inventions may, however, come at the cost of discouraging domestic invention in the licensing country if it displaces domestic research and development. But compulsory licensing may also encourage domestic research and development that is complementary to foreignowned inventions, and the ability to produce foreign-owned inventions may create opportunities for cumulative innovation (Scotchmer 1991) and learning by doing (Arrow 1962). As a result, the effects of compulsory licensing on domestic invention are theoretically ambiguous. Empirical analyses are complicated by the fact that governments are more likely to use compulsory licensing if demand for foreign-owned inventions is high and if domestic production capacities are advanced enough to produce them; both factors may increase domestic invention irrespective of compulsory licensing.\n\nAn episode of compulsory licensing under the US Trading with the Enemy Act (TWEA) as a result of World War I creates a unique opportunity to identify the\n\n38 Journal of Economic Perspectives",
+      "chunk_id": "00008_W3125878831_coarse_0021",
+      "chunk_type": "coarse",
+      "paper_id": "00008_W3125878831",
+      "paper_title": "Patents and Innovation: Evidence from\nEconomic History",
+      "section_hierarchy": [
+        "Patents and Innovation: Evidence from Economic History",
+        "Compulsory Licensing"
+      ],
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+      "chunk_index": 21,
+      "total_chunks": 34,
+      "overlap_with_previous": true
+    },
+    {
+      "text": "tion irrespective of compulsory licensing.\n\nAn episode of compulsory licensing under the US Trading with the Enemy Act (TWEA) as a result of World War I creates a unique opportunity to identify the\n\n38 Journal of Economic Perspectives\n\neffects of compulsory licensing on invention. Passed on November 17, 1917, the TWEA was intended to \u201cdislodge the hostile Hun within our gates\u201d and to place all enemy property \u201cbeyond the control or influence of its former owners, where it cannot eventually yield aid or comfort to the enemy\u201d (US Office of Alien Property Custodian 1919, p. 13 and 17). In March 28, 1918, the TWEA was amended to grant the Alien Property Custodian, Mitchell Palmer, the power to sell enemy property, including all enemy-owned patents \u201cas though he were the owner thereof\u201d (US Office of Alien Property Custodian 1919, p. 22). By February 22, 1919, Palmer announced that \u201cpractically all known enemy property in the United States has been taken over by me\u201d (US Office of Alien Property Custodian 1919, p. 7). In 1919, the US Chemical Foundation began to issue nonexclusive licenses of enemy-owned patents to US firms.\n\nIn Moser and Voena (2012) , we exploit this event to examine the effects of compulsory licensing on the patenting activity of US inventors in organic chemistry. Baseline estimates compare changes after 1918 in patent issues per year for 336 technologies with compulsory licensing, with changes for a control group of 7,248 technologies without licensing. Methodologically, the analysis takes advantage of the detailed classification system of the US Patent and Trademark Office to distinguish narrowly defined technologies (measured at the level of subclasses) that were differentially affected by compulsory licensing. Technology fixed effects (at the level of subclasses) and year fixed effects, as well as technology-specific trends make it possible to control for variation in the inventors' use of patents across technologies and over time. The difference-in-differences analyses comparing narrowly defined technologies (at a unit of analysis much below the industry level) make it possible to control for unobservable factors, such as improvements in education, the creation of protectionist tariffs, or the temporary absence of German competitors during the war, which may have encouraged US invention across all types of chemical technologies regardless of compulsory licensing.",
+      "chunk_id": "00008_W3125878831_coarse_0022",
+      "chunk_type": "coarse",
+      "paper_id": "00008_W3125878831",
+      "paper_title": "Patents and Innovation: Evidence from\nEconomic History",
+      "section_hierarchy": [
+        "Patents and Innovation: Evidence from Economic History",
+        "Compulsory Licensing"
+      ],
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+    },
+    {
+      "text": "the creation of protectionist tariffs, or the temporary absence of German competitors during the war, which may have encouraged US invention across all types of chemical technologies regardless of compulsory licensing.\n\nBaseline estimates indicate a 20 percent increase in domestic patenting in response to compulsory licensing (Moser and Voena 2012, p. 404). Estimates of time-varying effects indicate that this increase set in with a lag of eight to nine years and remained large and statistically significant throughout the 1930s (Moser and Voena 2012, p. 409).\n\nThese results suggest that compulsory licensing may help to increase innovation in the licensing countries, even though this increase occurs with some delay if the licensing country lags behind the technology frontier. At the time of the Trading with the Enemy Act, the United States lagged behind Germany in the field of organic chemistry and needed \u201ctime to learn\u201d (Arora and Rosenberg 1998, p. 79), even though other branches of US chemical invention were well-developed. For example, the hopes of duplicating German dyes seemed slim for US firms in 1919. Du Pont\u2019s initial runs of indigo (which had been developed and patented by the German chemical firm BASF) turned out green (Hounshell and Smith 1988, p. 90). Similarly, countries such as Brazil and India, which are technologically advanced in many fields, seek to license foreign technologies in fields where\n\nPatents and Innovation: Evidence from Economic History 39\n\ndomestic invention is weak, and may require some time to catch up to the frontier in these fields.\n\nLearning from patent documents is particularly difficult if information in patent documents is incomplete or obscure. The German BASF, for example, had \u201ceffectively bulwarked its discovery [of the Haber\u2013Bosch process of nitrogen fixation] with strong, broad patents which detailed meticulously the apparatus, temperatures and pressures, but cleverly avoided particulars as to the catalysts employed or their preparation\" (Haynes 1945, pp. 86\u201387). \u201cA prolonged learning experience was necessary [for US firms] to understand the two sides of catalysis, the chemical side and the engineering and design side\u201d (Mowery and Rosenberg 1998, p. 75).",
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+    },
+    {
+      "text": "6\u201387). \u201cA prolonged learning experience was necessary [for US firms] to understand the two sides of catalysis, the chemical side and the engineering and design side\u201d (Mowery and Rosenberg 1998, p. 75).\n\nIn the case of compulsory licensing, these problems are exacerbated because licensees typically cannot access the uncodified knowledge that is embodied in skilled workers and scientists who developed the original improvement. Thus the US Winthrop Chemical Company, which had acquired all of the German company Bayer's production machinery in addition to its patents \u201ccould not figure out how to make the sixty-three drugs that were supposed to be [its] stock-in-trade . . . The former German supervisors having been jailed or deported, nobody knew how to run the machines; . . . the patents, which were supposed to specify manufacturing processes, were marvels of obfuscation\u201d (Mann and Plummer 1991, pp. 52\u201353).\n\nDomestically, regulators have used compulsory licensing as a remedy to restore competition in industries that have become dominated by a small group of firms. For example, Scherer (1977, pp. 47\u201348) estimates that the US Federal Trade Commission and the US Department of Justice had made thousands of patents available by 1977, in industries ranging from glassware (in the 1946 breakup of the Hartford Empire pool) to copy machines (in the 1975 decision against Xerox). As a mechanism to address anticompetitive patenting behavior in domestic markets, compulsory licensing is expected to increase overall welfare by encouraging competition (Tandon 1982; Gilbert and Shapiro 1990). Survey results and case studies suggest that compulsory licencing may not provoke dramatic changes in rates of patenting and innovation (for example, Scherer 1977, Chien 2003), but more systematic empirical analyses are needed.",
+      "chunk_id": "00008_W3125878831_coarse_0024",
+      "chunk_type": "coarse",
+      "paper_id": "00008_W3125878831",
+      "paper_title": "Patents and Innovation: Evidence from\nEconomic History",
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+        "Patents and Innovation: Evidence from Economic History",
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+      "text": "may not provoke dramatic changes in rates of patenting and innovation (for example, Scherer 1977, Chien 2003), but more systematic empirical analyses are needed.\n\n## Conclusions\n\nCritics of the current patent system argue that a shift towards the strategic use of patents as a \u201csword\u201d to hold up competitors and extract license fees threatens the effectiveness of patents as a means to encourage innovation (for example, Duhigg and Lohr 2012). The underlying problems with this system, however, may be much broader, and understanding them is critical to the design of patent policies. As early as the 1850s, patentees who did not produce anything were able to hold up entire industries because they had been issued broad patents that had been affirmed in court.\n\n40 Journal of Economic Perspectives\n\nHistorical evidence suggests that in countries with patent laws, the majority of innovations occur outside of the patent system. Countries without patent laws have produced as many innovations as countries with patent laws during some time periods, and their innovations have been of comparable quality. Even in countries with relatively modern patent laws, such as the mid-nineteenth-century United States, most inventors avoided patents and relied on alternative mechanisms when these were feasible. Secrecy emerged as a key mechanism to protect intellectual property. The effectiveness of secrecy relative to patents varies with the technological characteristics of innovations across industries and over time. In industries where secrecy was effective, inventors were less likely to use patents. Advances in scientific analysis, which lowered the effectiveness of secrecy, increased inventors' dependency on patents.\n\nIncorporating these basic facts changes the predicted effects of patent laws on innovation. If a substantial share of innovation occurs outside of the patent system, policies that implement even the most drastic shifts towards stronger patents may fail to encourage innovation. If inventors' dependence on patent protection varies across industries, implementing stronger patent rights may alter the direction of technical change. If property rights in ideas encourage inventors to publicize technical information, a shift towards patenting may encourage the diffusion of knowledge.",
+      "chunk_id": "00008_W3125878831_coarse_0025",
+      "chunk_type": "coarse",
+      "paper_id": "00008_W3125878831",
+      "paper_title": "Patents and Innovation: Evidence from\nEconomic History",
+      "section_hierarchy": [
+        "Patents and Innovation: Evidence from Economic History",
+        "Conclusions"
+      ],
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+    {
+      "text": "ger patent rights may alter the direction of technical change. If property rights in ideas encourage inventors to publicize technical information, a shift towards patenting may encourage the diffusion of knowledge.\n\nHistory also offers a laboratory in which researchers can explore the effectiveness of alternative remedies to problems with the current patent system. For example, patent pools, which allow competing firms to combine their patents, have been proposed as a mechanism to resolve litigation risks as a result of overlapping patent grants, when more than one firm owns patents for the same technology. Historical evidence, however, indicates that pools may discourage and divert research and development by outside firms if the pools create differential litigation risks and licensing schemes that favor their members. Another prominent mechanism is compulsory licensing, which allows competitors to produce patented inventions without the consent of the patent owners. Historical evidence suggests that this policy may encourage innovation by allowing a new set of firms to produce a patented technology, and possibly by increasing competition to improve the technology.\n\nOverall, the weight of the existing historical evidence suggests that patent policies, which grant strong intellectual property rights to early generations of inventors, may discourage innovation. On the contrary, policies that encourage the diffusion of ideas and modify patent laws to facilitate entry and encourage competition may be an effective mechanism to encourage innovation. Carefully executed historical analyses can help to shed further light on these pressing issues of patent policy.\n\n\u25a0 I wish to thank David Autor, Eric Hilt, Ryan Lampe, Stephanie Lee, Xing Li, Joel Mokyr, Hoan Nguyen, John List, Paul Rhode, Chang-Tai Hseih, Carlos Serrano, Timothy Taylor, Joel Watson, and especially Gavin Wright for helpful suggestions, and the National Science Foundation for support through NSF Grant SES0921859 and CAREER Grant 1151180.\n\nPetra Moser 41",
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+      "text": "el Watson, and especially Gavin Wright for helpful suggestions, and the National Science Foundation for support through NSF Grant SES0921859 and CAREER Grant 1151180.\n\nPetra Moser 41\n\n## References\n\nAbramovitz, Moses. 1989. Thinking about Growth: And Other Essays on Economic Growth and Welfare. Cambridge University Press.\n\nAgnew, Ficher W. 1874. The Law and Practice relating to Letters Patent for Inventions: Together with Notices of the Patent Laws in Force in the Principal Foreign States and in the Colonies. London: Wildy and Sons.\n\nAllen, Robert C. 1983. \"Collective Invention.\" Journal of Economic Behavior and Organization 4(1): 1-24.\n\nAllen, Robert C. 2009. The British Industrial Revolution in Global Perspective. University of Chicago Press.\n\nAnton, James J., and Dennis A. Yao. 2004. \u201cLittle Patents and Big Secrets: Managing Intellectual Property.\u201d RAND Journal of Economics 35(1): 1\u201322.\n\nAoki, Reiko, and Sadao Nagaoka. 2004. \"The Consortium Standard and Patent Pools.\" Hi-Stat Discussion Paper 32.\n\nArora, A., and N. Rosenberg. 1998. \"Chemicals: A US success story.\" In Chemicals and Long-Term Economic Growth, edited by A. Arora, R. Landau, and N. Rosenberg, 71-102. New York: Wiley.\n\nArrow, Kenneth J. 1962. \"The Economic Implications of Learning by Doing.\" Review of Economic Studies 29(3): 155-73.\n\nBelfanti, Carlo. 2004. \"Guilds, Patents, and the Circulation of Technical Knowledge: Northern Italy during the Early Modern Age.\" Technology and Culture 45(3): 569-89.\n\nBerichterstattungs-Kommission der Deutschen Zollvereins-Regierungen. 1852\u201353. Aatlicher Bericht \u00fcber die Industrie-Austellung aller V\u00f6lker zu London im Jahre 1851 , Vols I\u2013III. Berlin, Prussia: Verlag der Deckerschen Geheimen Ober-Hofbuchdruckerei.\n\nBessen, James, and Michael J. Meurer. 2008. Patent Failure: How Judges, Bureaucrats, and Lawyers Put Innovators at Risk. Princeton University Press.\n\nBilir, L. Kamran, Petra Moser, and Irina Talis. 2011. \"Do Patent Treaties Encourage Technology Transfer? Evidence from the Paris Convention\" http://ssrn.com/abstract=1893052.\n\nBissell, Don. 1999. The First Conglomerate: 145 Years of the Singer Sewing Machine Company. Brunswick, ME: Audenreed Press.\n\nBittlingmayer, George. 1988. \"Property Rights, Progress, and the Aircraft Patent Agreement.\" Journal of Law and Economics 31(1): 227-48.\n\nBoldrin, Michele, and David K. Levine. 2008. Against Intellectual Monopoly . Cambridge University Press.\n\nBoult, Alfred J. 1895. Digest of British and Foreign\n\nPatent Laws, 2nd edition. London: Boult, Wade & Kilburn.",
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+      "chunk_index": 27,
+      "total_chunks": 34,
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+    {
+      "text": "ics 31(1): 227-48.\n\nBoldrin, Michele, and David K. Levine. 2008. Against Intellectual Monopoly . Cambridge University Press.\n\nBoult, Alfred J. 1895. Digest of British and Foreign\n\nPatent Laws, 2nd edition. London: Boult, Wade & Kilburn.\n\nCeccagnoli, Marco, Christopher Forman, and Wen Wen. 2012. \u201cPatent Pools, Thickets, and the Open Source Software Entry by Start-up Firms.\u201d http://conference.nber.org/confer/2012/IPKE /forman.pdf.\n\nChaudhuri, Shubham, Pinelopi K. Goldberg, and Panle Gia. 2006. \"Estimating the Effects of Global Patent Protection in Pharmaceuticals: A Case Study of Quinolones in India.\" American Economic Review 96(5): 1477-1514.\n\nChien, Colleen. 2003. \"Cheap Drugs at What Price to Innovation: Does the Compulsory Licensing of Pharmaceuticals Hurt Innovation.\" Berkeley Technology Law Journal 18(3):853.\n\nClark, Gregory. 2006. A Farewell to Alms: A Brief Economic History of the World. Princeton University Press.\n\nCohen, Wesley M., Richard R. Nelson, and John P. Walsh. 2000. \"Protecting Their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or Not).\" NBER Working Paper 7552.\n\nDavid, Paul A. 1994. \"The Evolution of Intellectual Property Institutions.\" In Economics in a Changing World , Vol. 1: System Transformation: Eastern and Western Assessments , edited by A. Aganbegyan, O. Bogomolov, and M. Kaser. London: MacMillan.\n\nDeardorff, Alan, V. 1992. \"Welfare Benefits of Global Patent Protection.\" Economica 59(233): 35-51.\n\nDepartment of Justice, and Federal Trade Commission. 1995. \"Antitrust Guidelines for the Licensing of Intellectual Property.\"\n\nDepartment of Justice, and Federal Trade Commission. 2007. Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition.\n\nDequiedt, Vianney, and Bruno Versaevel. 2012. \u201cPatent Pools and Dynamic R&D Incentives.\u201d Documents De Travail No. 07-03. http://papers .ssrn.com/sol3/papers.cfm?abstract_id=988303.\n\nDuhigg, Charles, and Steve Lohr. 2012. \u201cThe Patent, Used as a Sword.\u201d New York Times , October 7, p. A1. http://www.nytimes.com/2012/10/08 /technology/patent-wars-among-tech-giants-can -stifle-competition.html?smid=pl-share.\n\nDutton, Harold I. 1984. The Patent System and Inventive Activity during the Industrial Revolution, 1750\u20131852. Manchester, UK: Manchester University Press.\n\nFederal Register. 1975. July 23, 40(142): 30848.\n\n42 Journal of Economic Perspectives\n\nFlamm, Kenneth. 2012. \"A Tale of Two Standards: Patent Pools and Innovation in the Optical Disk Drive Industry.\" http://conference.nber.org /confer/2012/IPKE/flamm.pdf.\n\nGalv\u00e3o, Jane. 2002. \"Access to Antiretroviral Drugs in Brazil.\" Lancet 360(9348): 1862-65.",
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+      "text": "2012. \"A Tale of Two Standards: Patent Pools and Innovation in the Optical Disk Drive Industry.\" http://conference.nber.org /confer/2012/IPKE/flamm.pdf.\n\nGalv\u00e3o, Jane. 2002. \"Access to Antiretroviral Drugs in Brazil.\" Lancet 360(9348): 1862-65.\n\nGilbert, Richard J. 2004. \u201cAntitrust for Patent Pool: A Century of Policy Evolution.\u201d Stanford Technology Law Review , April 28. http://stlr.stanford .edu/2004/04/antitrust-for-patent-pools/.\n\nGilbert, Richard J., and Carl Shapiro. 1990. \u201cOptimal Patent Length and Breadth.\u201d RAND Journal of Economics 21(1): 106-112.\n\nGostin, Lawrence O. 2006. \"Medical Countermeasures for Pandemic Influenza: Ethics and the Law.\" JAMA 295(5): 554\u201356.\n\nGrossman, Gene M., and Edwin L.-C Lai. 2004. \u201cInternational Protection of Intellectual Property.\u201d American Economic Review 94(5): 1635\u201353.\n\nHabakkuk, H. J. 1962. American and British Technology in the Nineteenth Century: The Search for Labour-Saving Inventions. Cambridge University Press.\n\nHaber, Ludwig Fritz. 1958. The Chemical Industry during the Nineteenth Century: A Study of the Economic Aspect of Applied Chemistry in Europe and North America. Oxford, UK: Oxford University Press.\n\nHall, Bronwyn H., Adam B. Jaffe, and Manuel Trajtenberg. 2001. \"The NBER Patent Citation Data File: Lessons, Insights and Methodological Tools.\" NBER Working Paper 8498.\n\nHall, Bronwyn H., and Rosemarie Ham Ziedonis. 2001. \u201cThe Patent Paradox Revisited: An Empirical Study of Patenting in the US Semiconductor Industry, 1979\u20131995.\u201d RAND Journal of Economics 32(1): 101\u2013128.\n\nHarhoff, Dietmar, and Karin Hoisl. 2006. \u201cInstitutionalized Incentives for Ingenuity\u2014Patent Value and the German Employees\u2019 Inventions Act.\u201d Research Policy 36(8): 1143\u201362.\n\nHaynes, Williams. 1945. American Chemical Industry\u2014The World War I Period: 1912\u20131922. New York: D. Van Nostrand Company.\n\nHorstmann, Ignatius J., Glenn MacDonald, and Alan Slivinski. 1985. \"Patents as Information Transfer Mechanisms: To Patent or (Maybe) Not to Patent.\" Journal of Political Economy 93(5): 837-58.\n\nHounshell, David. 1985. From the American System to Mass Production, 1800\u20131932: The Development of Manufacturing Technology in the United States. Baltimore, MD: Johns Hopkins University Press.\n\nHounshell, David A., and John Kenly Smith. 1988. Science and Corporate Strategy: Du Pont R&D, 1902\u20131980. Cambridge University Press.\n\nJaquet, Eug\u00e8ne, and Chapuis, Alfred. 1945. La Montre Suisse. Bale and Olten: Editions Urs Graf.\n\nKhan, B. Zorina. 2005. The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790\u20131920. Cambridge University Press.",
+      "chunk_id": "00008_W3125878831_coarse_0029",
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+      "text": "e, and Chapuis, Alfred. 1945. La Montre Suisse. Bale and Olten: Editions Urs Graf.\n\nKhan, B. Zorina. 2005. The Democratization of Invention: Patents and Copyrights in American Economic Development, 1790\u20131920. Cambridge University Press.\n\nKhan, B. Zorina, and Kenneth L. Sokoloff. 1993. \"Schemes of Practical Utility: Entrepreneurship and Innovation among 'Great Inventors' in the United States, 1790\u20131865.\" Journal of Economic History 53(2): 289\u2013307.\n\nKhan, B. Zorina, and Kenneth L. Sokoloff. 1998. \"Patent Institutions, Industrial Organization and Early Technological Change: Britain and the United States, 1790\u20131850.\" In Technological Revolutions in Europe , edited by M. Bergand K. Bruland, Cheltenham, 292\u2013313. UK: Edward Elgar.\n\nKhan, B. Zorina, and Kenneth L. Sokoloff. 2001. \u201cHistory Lessons: The Early Development of Intellectual Property Institutions in the United States.\u201d Journal of Economic Perspectives 15(3): 233\u201346\n\nKremer, Michael. 2002. \"Pharmaceuticals and the Developing World.\" Journal of Economic Perspectives 16(4): 67\u201390.\n\nKretschmer, Winfried. 1999. Geschichte der Weltausstellungen. Frankfurt: Campus Verlag.\n\nKroker, Evelyn. 1975. Die Weltausstellungen im 19. Jahrhundert: Industrieller Leistungsnachweis, Konkurrenzverhalten und Kommunikationsfunktion unter Ber\u00fccksichtigung der Montanindustrie des Ruhrgebietes zwischen 1851 und 1880. G\u00f6ttingen, Germany: Vandhoeck Ruprecht.\n\nLamoreaux, Naomi R., and Kenneth L. Sokoloff. 1999. \"Inventors, Firms, and the Market for Technology in the Late Nineteenth and Early Twentieth Centuries.\" In Learning by Doing in Markets, Firms and Countries, edited by Naomi R. Lamoreaux, Daniel M. G. Raff, and Peter Temin P. University of Chicago Press.\n\nLampe, Ryan, and Petra Moser. 2010. \u201cDo Patent Pools Encourage Innovation? Evidence from the Nineteenth-Century Sewing Machine Industry.\u201d Journal of Economic History 70(4): 898\u2013920.\n\nLampe, Ryan, and Petra Moser. 2012a. \u201cPatent Pools and Innovation? Evidence from 20 U.S. Industries under the New Deal.\u201d Stanford Law and Economics Olin Working Paper No. 417. http:// ssrn.com/abstract=1967246.\n\nLampe, Ryan, and Petra Moser. 2012b. \u201cPatent Pools and Innovation in Substitutes\u2014Evidence from the 19th Century Sewing Machine Industry\u201d http://ssrn.com/abstract=1468062.\n\nLandes, David S. 1969. The Unbound Prometheus. Technological Change and Industrial Development in Western Europe from 1750 to the Present. Cambridge University Press.\n\nLayne-Farrar, Anne, and Josh Lerner. 2010. \"To Join or Not to Join: Examining Patent Pool\n\nPatents and Innovation: Evidence from Economic History 43\n\nParticipation and Rent Sharing Rules.\" International Journal of Industrial Organization 29(2): 294\u2013303.",
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+      "text": "arrar, Anne, and Josh Lerner. 2010. \"To Join or Not to Join: Examining Patent Pool\n\nPatents and Innovation: Evidence from Economic History 43\n\nParticipation and Rent Sharing Rules.\" International Journal of Industrial Organization 29(2): 294\u2013303.\n\nLerner, Josh. 2000. \"150 Years of Patent Protection.\" NBER Working Paper 7478.\n\nLerner, Josh, Marcin Strojwas, and Jean Tirole. 2007. \"The Design of Patent Pools: The Determinants of Licensing Rules.\" RAND Journal of Economics 38(3): 610-25.\n\nLerner, Josh, and Jean Tirole. 2004. \"Efficient Patent Pools.\" American Economic Review 94(3): 691-711.\n\nLevin, Richard C., Alvin K. Klevorick, Richard R. Nelson, and Sidney G. Winter. 1987. \"Appropriating the Returns from Industrial Research and Development.\" Brookings Papers on Economic Activity no. 3 (Special Issue on Microeconomics): 783-832.\n\nLi, Xing, Megan MacGarvie and Petra Moser. 2012. \"Dead Poets' Property\u2014The Copyright Act of 1814 and the Price of Books in the Romantic Period.\" http://ssrn.com/abstract=2170447.\n\nMachlup, Fritz, and Edith Penrose. 1950. \"The Patent Controversy in the Nineteenth Century.\" Journal of Economic History 10(1): 1\u201329.\n\nMacLeod, Christine. 1988. Inventing the Industrial Revolution: The English Patent System, 1660-1800. Cambridge University Press.\n\nMann, Charles C., and Mark L. Plummer. 1991. The Aspirin Wars: Money, Medicine, and 100 Years of Rampant Competition. New York: Knopf.\n\nMerges, Robert. 2001. \"Institutions for Intellectual Property Exchange: The Case of Patent Pools.\" In Intellectual Products: Novel Claims to Protection and their Boundaries, edited by Rochelle Dreyfuss. Oxford University Press.\n\nMokyr, Joel. 1990. The Lever of Riches: Technological Creativity and Economic Progress . New York: Oxford University Press.\n\nMokyr, Joel. 2009. The Enlightened Economy: An Economic History of Britain, 1700\u20131850. New Haven, CT: Yale University Press.\n\nMoser, Petra. 2005. \"How Do Patent Laws Influence Innovation? Evidence from NineteenthCentury World's Fairs.\" American Economic Review 95(4): 1215-36.\n\nMoser, Petra. 2011. \"Do Patents Weaken the Localization of Innovations? Evidence from World's Fairs.\" Journal of Economic History 71(2): 363-82.\n\nMoser, Petra. 2012. \"Innovation without Patents: Evidence from World's Fairs.\" Journal of Law and Economics 55(1): 43-74.\n\nMoser, Petra, and Tom Nicholas. 2012. \u201cPublicity is Prize-less. Non-monetary Awards as a Mechanism to Encourage Patenting.\u201d http://ssrn .com/abstract=1910220.\n\nMoser, Petra, and Paul W. Rhode. 2012. \u201cDid Plant Patents Create the American Rose?\u201d Chap. 8 in The Rate and Direction of Inventive Activity Revisited, edited by Joshua Lerner and Scott Stern. University of Chicago Press.",
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+      "text": ".com/abstract=1910220.\n\nMoser, Petra, and Paul W. Rhode. 2012. \u201cDid Plant Patents Create the American Rose?\u201d Chap. 8 in The Rate and Direction of Inventive Activity Revisited, edited by Joshua Lerner and Scott Stern. University of Chicago Press.\n\nMoser, Petra, and Alessandra Voena. 2012. \"Compulsory Licensing: Evidence from the Trading-with-the-Enemy-Act.\" American Economic Review 102(1): 396-427.\n\nMoser, Petra, Alessandra Voena, and Fabian Waldinger. 2011. \u201cGerman Jewish \u00c9migr\u00e9s and U.S. Invention.\u201d March 21. Available at SSRN: http:// ssrn.com/abstract=1910247 or http://dx.doi.org /10.2139/ssrn.1910247.\n\nMoser, Petra, and Assaf Zimring. 2012. \u201cPatent Laws, Market Size and Innovation.\u201d Earlier version available at SSRN: http://ssrn.com/abstract =2010136.\n\nMowery, David C. and Nathan Rosenberg. 1998. Paths of Innovation: Technological Change in 20th-Century America . Cambridge University Press.\n\nNordhaus, William D. 1969. \"An Economic Theory of Technological Change.\" American Economic Review 59(2): 18-28.\n\nNorth, Douglass C., and Robert P. Thomas. 1973. The Rise of the Western World: A New Economic History. Cambridge University Press.\n\nNuvolari, Alessandro. 2004. \"Collective Invention during the British Industrial Revolution: The Case of the Cornish Pumping Engine.\" Cambridge Journal of Economics 28(3): 347\u201363.\n\nOfficer, Lawrence, and Sam Williamson. 2011. \u201cMeasures of Worth.\u201d MeasuringWorth.com, www .measuringworth.com/worthmeasures.php.\n\nParton, James. 1867. \"History of the Sewing Machine.\" Atlantic Monthly, May.\n\nPenrose, Edith Tilton. 1951. The Economics of the International Patent System. Baltimore, MD: Johns Hopkins University Press.\n\nRobb, Harry C., Jr. 1964. \"Plant Patents.\" In Encyclopaedia of Patent Practice and Invention Management, edited by Robert Calvert, pp. 641-55. New York: Reinhold.\n\nRosenberg, Nathan. 1963. \"Technological Change in the Machine Tool Industry, 1840-1910.\" Journal of Economic History 23(4): 414-43.\n\nRosenberg, Nathan. 1969. The American System of Manufactures: The Report of the Committee on the Machinery of the United States 1855, and the Special Reports of George Wallis and Joseph Whitworth, 1854. Edinburgh University Press.\n\nRosenberg, Nathan. 1972. Technology and American Economic Growth. New York: Harper.\n\nRossman, Joseph. 1930. \"The Planter Breeder Becomes an Inventor.\" Science News-Letter 18, December 20, pp. 349-95.\n\n44 Journal of Economic Perspectives\n\nRothbarth, Edwin. 1946. \"Causes of the Superior Efficiency of U.S.A. Industry Compared with British Industry.\" Economic Journal 56: 383-90.",
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+      "text": "tor.\" Science News-Letter 18, December 20, pp. 349-95.\n\n44 Journal of Economic Perspectives\n\nRothbarth, Edwin. 1946. \"Causes of the Superior Efficiency of U.S.A. Industry Compared with British Industry.\" Economic Journal 56: 383-90.\n\nScherer, Frederic. M. 1977. The Economic Effects of Patent Compulsory Licensing. New York University, Graduate School of Business Administration, Center for the Study of Financial Institutions.\n\nSchiff, Eric. 1971. Industrialization without National Patents: The Netherlands 1868\u20131912, Switzerland 1850\u20131907. Princeton University Press.\n\nSchmookler, Jacob. 1962. \"Economic Sources of Inventive Activity.\" Journal of Economic History 22(1): 1-20.\n\nSchmookler, Jacob. 1966. Invention and Economic Growth. Cambridge: Harvard University Press.\n\nScotchmer, Suzanne. 1991. \"Standing on the Shoulders of Giants: Cumulative Research and the Patent Law.\" Journal of Economic Perspectives 5(1): 29-41.\n\nShapiro, Carl. 2001. \"Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard Setting.\" Chap. 4 in Innovation Policy and the Economy, Vol. 1, edited by A. Jaffe, J. Lerner, and S. Stern. Cambridge, MA: MIT Press.\n\nSokoloff, Kenneth. 1988. \"Inventive Activity in Early Industrial America: Evidence from Patent Records, 1790-1846.\" Journal of Economic History 48(4): 813-50.\n\nSteinbrook, Robert. 2007. \"Thailand and the\n\nCompulsory Licensing of Efavirenz.\" New England Journal of Medicine 356(6): 544-46.\n\nStewart, Amy. 2007. Flower Confidential: The Good, the Bad, and the Beautiful in the Business of Flowers. Chapel Hill, NC: Algonquin Books of Chapel Hill.\n\nStubbs, Kevin D. 2002. Race to the Front: The Material Foundation of Coalition Strategy in the Great War, 1914\u20131918. Westport, CT: Greenwood Publishing Group.\n\nTandon, Pankaj. 1982. \"Optimal Patents with Compulsory Licensing.\" Journal of Political Economy 90(3): 470-86.\n\nThomson, Ross. 2009. Structures of Change in the Mechanical Age: Technological Innovation in the United States, 1790\u20131865. John Hopkins University Press.\n\nUS Office of Alien Property Custodian. 1919. \u201cAlien Custodian Report: A Detailed Report by the Alien Property Custodian of All Proceedings Had by Him under the Trading with the Enemy Act during the Calendar Year 1918 and to the Close of Business on February 15, 1919.\u201d Washington: Government Printing Office.\n\nVaughan, Floyd L. 1956. The United States Patent System: Legal and Economic Conflicts in American Patent History. Norman, OK: University of Oklahoma Press.\n\nWallace, Anthony F. C. 1986. Rockdale: The Growth of an American Village in the Early Industrial Revolution. New York: Knopf.",
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+      "text": "# The Case Against Patents\n\nMichele Boldrin and David K. Levine\n\nThe case against patents can be summarized briefly: there is no empirical evidence that they serve to increase innovation and productivity, unless productivity is identified with the number of patents awarded\u2014which, as evidence shows, has no correlation with measured productivity. This disconnect is at the root of what is called the \u201cpatent puzzle\u201d: in spite of the enormous increase in the number of patents and in the strength of their legal protection, the US economy has seen neither a dramatic acceleration in the rate of technological progress nor a major increase in the levels of research and development expenditure.\n\nBoth theory and evidence suggest that while patents can have a partial equilibrium effect of improving incentives to invent, the general equilibrium effect on innovation can be negative. The historical and international evidence suggests that while weak patent systems may mildly increase innovation with limited side effects, strong patent systems retard innovation with many negative side effects. More generally, the initial eruption of innovations leading to the creation of a new industry\u2014from chemicals to cars, from radio and television to personal computers and investment banking\u2014is seldom, if ever, born out of patent protection and is instead the fruit of a competitive environment. It is only after the initial stage of rampant growth ends that mature industries turn toward the legal protection of patents, usually because their internal growth potential diminishes and they become more concentrated. These observations, supported by a steadily increasing body of evidence, are consistent with\n\n\u25a0 Michele Boldrin is Joseph Gibson Hoyt Distinguished University Professor of Economics and David K. Levine is John H. Biggs Distinguished University Professor of Economics, both at Washington University in St. Louis, Missouri. They are also both Research Fellows with the Federal Reserve Bank of St. Louis. Their email addresses are mboldrin@artsci.wustl.edu and david@dklevine.com.\n\nhttp://dx.doi.org/10.1257/jep.27.1.3.\n\ndoi=10.1257/jep.27.1.3\n\n4 Journal of Economic Perspectives",
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+      "text": "with the Federal Reserve Bank of St. Louis. Their email addresses are mboldrin@artsci.wustl.edu and david@dklevine.com.\n\nhttp://dx.doi.org/10.1257/jep.27.1.3.\n\ndoi=10.1257/jep.27.1.3\n\n4 Journal of Economic Perspectives\n\ntheories of innovation emphasizing competition and first-mover advantage as the main drivers of innovation, and they directly contradict \u201cSchumpeterian\u201d theories postulating that government-granted monopolies are crucial to provide incentives for innovation. A properly designed patent system might serve to increase innovation at a certain time and place\u2014and some patent systems, such as the late-nineteenth century German system allowing only process but not final product patents, have been associated with rapid innovation. Unfortunately, the political economy of government-operated patent systems indicates that such systems are susceptible to pressures that cause the ill effects of patents to grow over time. The political economy pressures tend to benefit those who own patents and are in a good position to lobby for stronger patent protection, but disadvantage current and future innovators as well as ultimate consumers. This explains why the political demand for stronger patent protection comes from old and stagnant industries and firms, not from new and innovative ones. Our preferred policy solution is to abolish patents entirely and to find other legislative instruments, less open to lobbying and rent seeking, to foster innovation when there is clear evidence that laissez-faire undersupplies it. However, if that policy change seems too large to swallow, we discuss in the conclusion a set of partial reforms that could be implemented as part of an incremental strategy of reducing the harm done by the patent system.",
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+      "text": "s in the conclusion a set of partial reforms that could be implemented as part of an incremental strategy of reducing the harm done by the patent system.\n\n## Do Patents Encourage Productivity Growth?\n\nIf there is to be any rationale for patent systems, with all their ancillary costs, it must be that they increase innovation and productivity. What is the evidence?\n\nSimply eyeballing the big trends shows that patenting has exploded over the last decades. In 1983 in the United States, 59,715 patents were issued; by 2003, 189,597 patents were issued; and in 2010, 244,341 new patents were approved. In less than 30 years, the flow of patents more than quadrupled. By contrast, neither innovation nor research and development expenditure nor factor productivity have exhibited any particular upward trend. According to the Bureau of Labor Statistics, annual growth in total factor productivity in the decade 1970 \u2013 1979 was about 1.2 percent, while in the decades 1990 \u2013 1999 and 2000 \u2013 2009 it has been a bit below 1 percent. Meanwhile, US research and development expenditure has been oscillating for more than three decades in a narrow band around 2.5 percent of GDP. The recent explosion of patents, in other words, has not brought about any additional surge in useful innovations and aggregate productivity. In new industries such as biotechnology and software \u2014 where innovation was already thriving in their absence \u2014 patents have been introduced without any positive impact on the rate of innovation. The software industry is an important case in point. In a dramatic example of judge-made law, software patents became possible for the first time in the early 1990s. Bessen and Meurer, in a large body of empirical work culminating in Patent Failure (2008), have studied the consequences of this experiment and have concluded that it damaged social welfare.\n\nMichele Boldrin and David K. Levine 5",
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+      "text": "ulminating in Patent Failure (2008), have studied the consequences of this experiment and have concluded that it damaged social welfare.\n\nMichele Boldrin and David K. Levine 5\n\nAcademic studies have also typically failed to find much of a connection between patents and innovation. In Boldrin and Levine (2008b) , we conducted a metastudy gathering the 24 studies (including three surveys of earlier empirical work) we could find in 2006 that examined whether introducing or strengthening patent protection leads to greater innovation. The executive summary states: \u201c [T]hese studies find weak or no evidence that strengthening patent regimes increases innovation; they find evidence that strengthening the patent regime increases patenting! They also find evidence that, in countries with initially weak IP [intellectual property] regimes, strengthening IP increases the flow of foreign investment in sectors where patents are frequently used. \u201d Actually, the issue of promoting foreign direct investment, while a well-established empirical consequence of strengthening patent regimes, is entirely beside the point of this essay. There are a number of ways to strengthen a country's institutions and infrastructure in a way that would encourage foreign direct investment \u2014 and, in any case, foreign direct investment is not equivalent to innovation.\n\nOur conclusion was in keeping with other studies that have addressed this question. Some studies have failed to find any connection even between changes in the strength of patent law and the amount of patenting, while others fail to find a connection between patents and some measure of innovation or productivity. For example, after failing to find a single study claiming that innovation increased as a consequence of the strengthening of US patent protection in the 1980s, Gallini (2002, p. 139) wrote in this journal: \u201cAlthough it seems plausible that the strengthening of US patents may have contributed to the rise in patenting over the past decade and a half, the connection has proven difficult to verify.\u201d Similarly, Jaffe (2000) also examines many studies and concludes: \u201c[D]espite the significance of the policy changes and the wide availability of detailed data relating to patenting, robust conclusions regarding the empirical consequences for technological innovations of changes in patent policy are few. There is widespread unease that the costs of stronger patent protection may exceed the benefits. Both theoretical and, to a lesser extent, empirical research suggest this possibility.\u201d $^1$",
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+      "text": "innovations of changes in patent policy are few. There is widespread unease that the costs of stronger patent protection may exceed the benefits. Both theoretical and, to a lesser extent, empirical research suggest this possibility.\u201d $^1$\n\n1 The study by Kanwar and Evanson (2001) illustrates some of the issues that arise in these kinds of studies. They have two five-year averages on 31 countries for the period 1981 \u2013 1990. They find support for the idea that higher patent protection leads to higher research and development spending as a fraction of GDP. However, a different story seems equally plausible. Countries with a larger market can more easily pay the fixed costs of innovation. Indeed, one perspective is that their data essentially compares countries with relatively small economies, little intellectual property protection, and low R & D spending with countries with relatively larger economies, greater intellectual property protection, and higher R & D spending. For example, R & D spending as a fraction of GDP in their data ranges from a ten-year average of 0.2 percent in Jordan to 2.8 percent in Sweden. If we combine their data with GDP data from The 1990 CIA World Fact Book to take account of the size of the economy, increasing the strength of intellectual property protection from 0 to 1 to 2 on their five-point scale does increase R & D expenditure. But as intellectual property protection is increased further, the gains to R & D expenditure levels then falls. Even at the lower levels, we are probably observing primarily the effect of foreign direct investment: that is, among poor countries with near-zero intellectual property protection, increases bring in more foreign investment and in doing so directly raise R & D spending. In higher-income countries with larger economies, foreign investment is not an issue, and increases in intellectual property have little or no effect on innovation.\n\n6 Journal of Economic Perspectives",
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+      "text": "ith larger economies, foreign investment is not an issue, and increases in intellectual property have little or no effect on innovation.\n\n6 Journal of Economic Perspectives\n\nThe Lerner (2002) study is especially notable because he examined all significant changes in patent law in all countries over the last 150 years. His conclusion: \u201cConsider, for instance, policy changes that strengthen patent protection. Once overall trends in patenting are adjusted for, the changes in patents by residents of the country undertaking the policy change are negative, both in Great Britain and in the country itself. Subject to the caveats noted in the conclusion this evidence suggests that these policy changes did not spur innovation.\u201d This, in summary, is what is currently known as the \u201cpatent puzzle\u201d\u2014although as we will explain, it is substantially coherent with a theory of innovation that emphasizes the gains from competition and first-mover incentives, rather than benefits from the monopoly power of patents.\n\nEvidence at the sectoral level of the US economy shows the same disconnect between patenting and productivity. In Boldrin, Correa, Levine, and Ornaghi (2011) , we carried out a sequence of statistical tests and econometric estimations on two datasets: an original microeconomic dataset obtained by combining firm-level information obtained through Compustat, the National Bureau of Economic Research, and the Bureau of Labor Statistics and an enriched version of the dataset used by Aghion, Bloom, Blundell, Griffith, and Howitt (2005) in their study of industry-level mark-ups. Conclusions must of course be drawn with care from this kind of data because, across industries, the strength of competition, patenting, and productivity are simultaneously determined and intertwined with technological change. With that reservation appropriately noted, at the industry level there is, in general, no statistically significant correlation between measures of productivity (whether measured by labor or total factor productivity) and of patenting activity (whether measured by number of patents or citations of patents).",
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+      "text": "nt correlation between measures of productivity (whether measured by labor or total factor productivity) and of patenting activity (whether measured by number of patents or citations of patents).\n\nWe then investigated the relationships between patents, competition, and productivity further. When we regressed measures of patents (or patent citations) on a measure of competition (as measured by the inverse of profitability) used by Aghion, Bloom, Blundell, Griffith, and Howitt (2005) , we found a positive relationship that is remarkably robust to changes in industry classification, time period, and set of sampled industries. That is, patents were more common in competitive industries. We also studied the correlation between the same measure of competitive pressure and objective measures of labor productivity growth. In our preferred specification, we found that average annual growth of productivity in the sectors with the highest level of competition is up to 2 percent bigger than in the sectors with the lowest level of competition. These are strikingly large differences when cumulated over various decades, as it is the case in our dataset. This finding of a positive correlation between competition and productivity at the sectorial level replicated a pioneering, and unfortunately forgotten, pattern reported in Stigler (1956) .\n\nThe accumulated findings of no positive relationship between patenting and productivity are not conclusive, and arguments have raged over the specific data used, whether to look for a structural break in the data, how the researcher seeks\n\nThe Case Against Patents 7\n\nto correct for endogeneity, and so on. $^2$ However, it is fair to say that the sector-level, national, and cross-national evidence fail to provide any clear empirical link from patents to innovation or to productivity. This lack of connection is consistent with the view that the use of patents either as a defensive or as a rent-seeking tool is more widespread than one might have predicted. In addition, the empirical evidence is consistent with the proposition that greater competition, not patents, is the main factor leading to innovation and greater productivity.",
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+      "text": "might have predicted. In addition, the empirical evidence is consistent with the proposition that greater competition, not patents, is the main factor leading to innovation and greater productivity.\n\n## Theory and Practice of Patents and Innovation\n\nThere is little doubt that providing a monopoly as a reward for innovation increases the incentive to innovate. There is equally little doubt that granting a monopoly for any reason has the many ill consequences we associate with monopoly power\u2014the most important and overlooked of which is the strong incentive of a government-granted monopolist to engage in further political rent seeking to preserve and expand its monopoly or, for those who do not yet have a monopoly, to try to obtain one. These effects are at least to some extent offsetting: while the positive impact of patents is the straightforward partial equilibrium effect of increasing the profits of the successful innovator to the monopolistic level, the negative one is the subtler general equilibrium effect of reducing everybody else's ability to compete while increasing for everyone the incentive to engage in socially wasteful lobbying efforts.\n",
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+      "text": "te while increasing for everyone the incentive to engage in socially wasteful lobbying efforts.\n\n\n### Downstream Innovation, Defensive Patenting, and Patent Trolls\n\nIn the long run, even the positive partial equilibrium effect of patents in providing an incentive for innovation may be more apparent than real: the existence of a large number of monopolies created by past patent grants reduces the incentives for current innovation because current innovators are subject to constant legal action and licensing demands from earlier patent holders. The downstream blocking effect of existing monopoly grants on incentives for future innovation\n\n2 For a sense of these controversies, Aghion, Bloom, Blundell, Griffith, and Howitt (2005) find an \u201cinverted-U\u201d relationship between the extent of competition, as measured by the inverse of mark-ups, and a measure of patenting activity, based on a dataset of US patents of UK firms. In other words, they find that the maximum innovative effort (as measured by patents) occurs at some \u201cintermediate\u201d position between a high and low level of competition. However, Hashmi (2011) reexamines the inverted-U relationship using data from publicly traded US manufacturing firms and finds a robust positive relationship between the inverse of markups and citation-weighted patents. Correa (2012) reexamines the same dataset of UK firms and shows that the prediction of an inverted-U is overturned when allowing for the possibility that innovations follow a \u201cmemory process,\u201d where the current probability of introducing a new innovation increases when a firm successfully innovated in the previous period. He also finds a structural break in the data in 1981, when the Court of Appeals for the Federal Circuit was established to hear appeals of patent cases. Overall, Correa finds a positive innovation\u2013competition relationship for the memory industries before the 1982 reform, but no relationship between innovation and competition for those industries that he classifies as memory-less.\n\n8 Journal of Economic Perspectives",
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+      "text": "for the memory industries before the 1982 reform, but no relationship between innovation and competition for those industries that he classifies as memory-less.\n\n8 Journal of Economic Perspectives\n\nhas greatly increased in recent decades because modern products are made up of so many different components. The recent\u2014and largely successful\u2014efforts of Microsoft to impose a licensing fee on the large and expanding Android phone market is but one case in point. With the exception of Motorola Mobility, all the handset manufacturers have agreed to the fee, and Motorola lost its first battle against the fee in spring 2012\u2014fought not in court but in the more receptive domain of the US International Trade Commission (Investigation Number 337-TA744, May 18, 2012). Microsoft is attempting to charge a licensing fee solely over a patent involving the scheduling of meetings\u2014a rarely used feature of modern smartphones. The meeting-schedule feature is but one of many thousands of patented \u201cideas\u201d used in a modern smartphone, and each owner of each patent potentially can charge a licensing fee. Hence, the main dynamic general equilibrium effect of a patent system is to subject future inventions to a gigantic hold-up problem: with many licenses to be purchased and uncertainty about the ultimate value of the new innovation, each patent holder, in raising the price of his \u201ccomponent,\u201d imposes an externality on other patent holders and so charges a higher than efficient licensing fee. In Boldrin and Levine (2005) and Llanes and Trento (2009), we and others have explored the theory; and many case studies involving patents (and other fractionated ownership problems) can be found in Heller (2008).\n\nTo understand more about the actual effect of patents in the real world, consider the recent purchase by Google of Motorola Mobility, primarily for its patent portfolio\u2014not for the ideas and innovations in that portfolio. Few if any changes or improvements to Google's Android operating system will result from the ownership or study of these software patents. Google's purpose in obtaining this patent portfolio is purely defensive: it can be used to countersue Apple and Microsoft and blunt their legal attack on Google. These remarks apply to the vast bulk of patents: they do not represent useful innovation at all and are just weapons in an arms race. This is not news: the same message emerged decades ago from the Levin, Klevorick, Nelson, and Winter (1987) and Cohen, Nelson, and Walsh (2000) surveys of research and development managers.",
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+      "text": "at all and are just weapons in an arms race. This is not news: the same message emerged decades ago from the Levin, Klevorick, Nelson, and Winter (1987) and Cohen, Nelson, and Walsh (2000) surveys of research and development managers.\n\nOne could argue that the costs of building up a patent portfolio to engage in this sort of defensive patenting are not too large: after all, it can cost as little as $15,000 to file a successful patent application, and filing applications on a larger scale might be cheaper. However, the acquisition of large patent portfolios by incumbents creates huge barriers to entry. In the smartphone market, for example, Apple is the market leader and Microsoft is unable to produce a product that appeals to consumers. Each are incumbent firms with a large patent portfolio. In this market, Google is the new entrant and innovator and, while wealthy, Google found itself lacking a large defensive patent portfolio. Hence we see both Apple and Microsoft attacking Google with patent litigations, generating hundreds of millions in wasteful legal costs and no social benefit whatsoever.\n\nDespite the fact that patents are mostly used for arms races and that these, in turn, are driven by patent trolls, there does not yet exist convincing formal models of the ways in which this interaction can inhibit innovation. In a pure arms\n\nMichele Boldrin and David K. Levine 9\n\nrace theory, if all firms get counterbalancing patent portfolios and all innovate, then they would all have innovated in the absence of patents\u2014hence, patents do not encourage innovation. This follows because with counterbalancing patent portfolios, no firm can sue any other firm\u2014exactly as would be the case in the absence of patents. Hence in this setting patents simply add a cost to innovation: if you wish to innovate, you must acquire an expensive patent portfolio to avoid trolls. On the other hand if a patentholder does not produce a marketable product and hence cannot be countersued\u2014like Microsoft in the phone market or other patent trolls in other markets\u2014then patents become a mechanism for sharing the profits without doing the work. In this scenario, not only do patents discourage innovation, but they are also a pure waste from a social standpoint.",
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+      "text": "kets\u2014then patents become a mechanism for sharing the profits without doing the work. In this scenario, not only do patents discourage innovation, but they are also a pure waste from a social standpoint.\n\n## Patents and Information Disclosure\n\nAnother widely cited benefit of patent systems \u2014 although not so much in the economics literature \u2014 is the notion that patents are a substitute for socially costly trade secrecy and improve communication about ideas. From a theoretical point of view, the notion that patents are a substitute for trade secrecy fails in the simplest model. If a secret can be kept for $N$ years and a patent lasts $M$ years, then an innovator will patent when $N < M$ . In other words, ideas will be patented when it seems likely that the secret would have emerged before the patent expired and not patented if the secret can be kept. In practice, it is uncertain when the secret will leak out, but it can be shown that the basic intuition remains intact in the face of uncertainty (Boldrin and Levine 2004; Ponce 2007) . $^3$\n\nIt is also the case that the extent of practical \u201c disclosure \u201d in modern patents is as negligible as the skills of patent attorneys can make it. It is usually impossible to build a functioning device or software program from a modern patent application; this is made especially clear by the fact that some patented ideas do not and cannot work. For example, US Patent 6,025,810 was granted for moving information through the fifth dimension. While detailed studies of the usefulness of disclosure in patent applications are not available, companies typically instruct their engineers developing products to avoid studying existing patents so as to be spared subsequent claims of willful infringement, which raises the possibility of having to pay triple damages. According to sworn testimony by Google's chief of Android development during the legal battles between Oracle and Google (for example, Niccolai 2012), the engineers that developed Android were unaware of Apple (or other) patents, and so were unlikely to have been helped by them. The opinion of Brec (2008), a Microsoft developer, reflects that of many practitioners:\n\n[Microsoft policy is for developers to] never search, view, or speculate about patents. I was confused by this guidance till I wrote and reviewed one of my\n\n3 A more subtle point is that secrecy may bias the type of inventive activity away from innovations that are not easily kept secret to those that can be. In this symposium, Moser offers some of the historical evidence on this point.\n\n10 Journal of Economic Perspectives",
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+      "text": "secrecy may bias the type of inventive activity away from innovations that are not easily kept secret to those that can be. In this symposium, Moser offers some of the historical evidence on this point.\n\n10 Journal of Economic Perspectives\n\nown patents. The legal claims section\u2014the only section that counts\u2014was indecipherable by anyone but a patent attorney. Ignorance is bliss and strongly recommended when it comes to patents.\n\nThe related idea that patents somehow improve communication about ideas, thereby creating some positive externality\u2014a notion key to the \u201cpublic\u2013private\u201d partnership between governments and private research organizations in which the government funds the research and then gives the private organization a monopoly over what is developed in the course of research\u2014is backed by neither theory nor evidence. It is impossible to study the history of innovation without recognizing that inventors and innovators exchange ideas as a matter of course and that secrecy occurs, when it occurs, typically in the final stages of an innovation process when some ambitious inventors hope to corner the market for a functioning device by patenting it. A good case in point is that of the Wright brothers, who made a modest improvement in existing flight technology that they kept secret until they could lock it down on patents, then used their patents both to monopolize the US market and to prevent further innovation for nearly 20 years (Shulman, 2003). The role that Marconi and his patent played in the development of the radio is altogether similar (Hong 2001), as are innumerable other stories. At the opposite extreme we have, again among many, the example of the Cornish steam engine discussed in Nuvolari (2004, 2006). Here engineers exchanged nonpatented ideas for decades in a collaborative effort to improve efficiency. The contemporary FLOSS (Free/Libre and Open Source Software) community is another successful example of how collaboration and exchange of ideas can thrive without the monopoly power granted by patents.",
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+      "text": "SS (Free/Libre and Open Source Software) community is another successful example of how collaboration and exchange of ideas can thrive without the monopoly power granted by patents.\n\n## First-Mover Advantages and Incentives for Innovation\n\nIn most industries, the first-mover advantage and the competitive rents it induces are substantial without patents. The smartphone industry\u2014laden as it is with patent litigation\u2014is a case in point. Apple derived enormous profits in this market before it faced any substantial competition. The first iPhone was released on June 29, 2007. The first serious competitor, the HTC Dream (using the Android operating system) was released on October 22, 2008. By that time, over 5 million iPhones had been sold, and sales soared to over 25 million units during the subsequent year, while total sales of all Android-based phones were less than 7 million. In the tablet market, the iPad has no serious competitor as of late 2012 despite having been introduced on April 10, 2010. While it is hard to prove this delayed imitation also would have occurred in the complete absence of patents, intuition suggests\u2014 and our formal model in Boldrin and Levine (2004) predicts\u2014that there is little reason to assert patent rights while the first-mover advantage is still active. Apple did not initially try to use patents to prevent the Android phones from coming into its market and the subsequent \u201cpatents\u2019 fight\u201d has been taking place largely after 2010; these facts are consistent with a substantial first-mover advantage. How valuable for Apple was the delay in the Android phones entry? Largely because Apple kept its\n\nThe Case Against Patents 11\n\nfirst-mover advantage in spite of a large imitative entry in this market, the value of Apple stock\u2014during a severe market downturn\u2014rose by a factor of approximately five. While there may have been some delay in entry from the competition due to Apple\u2019s threat\u2014since executed\u2014of patent litigation, the fact is that similar but less-successful devices had been available for a number of years before Apple finally cracked the market.\n\nLess anecdotal than the story of the iPhone is the survey of research and development managers in Cohen, Nelson, and Walsh (2000). Here, over 50 percent of managers indicate lead time (first-mover advantage) is important to earning a return on innovation; outside the pharmaceutical and medical instruments industry, less than 35 percent of managers indicate that patents are important.",
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+      "text": "managers indicate lead time (first-mover advantage) is important to earning a return on innovation; outside the pharmaceutical and medical instruments industry, less than 35 percent of managers indicate that patents are important.\n\nTo understand patents in practice, it is necessary to examine the lifecycle of industries (for example, Jovanovich and MacDonald 1994; Scherer 1990). Typically a new, hence innovative, industry begins with a competitive burst of entries through which very many innovators try hard to get their products to market. In these early stages, many firms bring different versions of the new product to the market (think of the American auto industry in the early twentieth century or the software industry in the 1980s and 1990s) while demand for the new product grows rapidly and the quality of products is rapidly improved. At this stage of the industry lifecycle, the price elasticity of demand is typically high; what is important is not to dominate the market, but rather to get your own products quickly to market and to reduce costs. From the perspective of competing firms, your cost-reducing innovation is good for me in the same way that my cost-reducing innovation is good for you\u2014hence, let us all imitate each other and compete in the market.\n\nAs the industry matures, demand stabilizes and becomes much less price elastic; the scope for cost-reducing innovations decreases; the benefits of monopoly power grow; and the potential for additional product innovation shrinks. Typically there is a shakeout in which many firms either leave the industry or are bought out. The automobile industry is a classical historical example, but many readers will have a more vivid memory of the bursting of the dot-com bubble, which makes this point even more forcefully. At this stage of the industry lifecycle, rent seeking becomes important and patents are widely used to inhibit innovation, prevent entry, and encourage exit. If we look at patent litigation in practice\u2014and as predicted by theories of first-mover competition (Boldrin and Levine 2004, among others)\u2014it takes place when innovation is low. When an industry matures, innovation is no longer encouraged; instead, it is blocked by the ever-increasing appeal to patent protection on part of the insiders.",
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+      "text": "thers)\u2014it takes place when innovation is low. When an industry matures, innovation is no longer encouraged; instead, it is blocked by the ever-increasing appeal to patent protection on part of the insiders.\n\nWhile patent litigation has increased, few patents are actively used. Patent litigation often involves dying firms that have accumulated huge stockpile of patents but are no longer able to produce marketable products and that are now suing new and innovative firms. For example, Texas Instruments was one of the first producers of microchips, and many in our generation remember the capabilities of their first TI calculator. But Texas Instruments was unable to make the transition to the personal computer revolution and became, for a while, the symbol of a dying company\n\n12 Journal of Economic Perspectives\n\ntrying to stay alive by suing the newcomers. $^4$ In more recent times, Microsoft\u2014once the giant bestriding the software industry\u2014has been unable to make the leap to portable devices such as telephones and tablet personal computers. Thus, Microsoft now uses patent litigation to try to claim a share of the profits Google generates in this market. Back in 1991, Bill Gates said: \u201cIf people had understood how patents would be granted when most of today\u2019s ideas were invented and had taken out patents, the industry would be at a complete standstill today . . . A future start-up with no patents of its own will be forced to pay whatever price the giants choose to impose.\u201d Today, Microsoft lobbies across Europe and Asia for the introduction of software patents, a prize it has already obtained in its home country.\n\nThe cost of litigating patents is not insubstantial either. Bessen and Meurer (2008) used stock market event studies to estimate the cost of patent litigation: they estimate that during the 1990s such costs rose substantially until, at the end of the period, they constituted nearly 14 percent of total research and development costs. A related but more difficult-to-quantify phenomenon is the rise of uncertainty caused by the legal system. A case in point is the NTP Inc. patents that were used to threaten the Blackberry network with a shutdown. In 2006, Research in Motion (RIM), the producer of Blackberry, agreed to pay $ 612.5 million to license the patent in question from NTP (Svensson 2006). The patent was later invalidated by the court \u2014 but RIM did not get its money back (Salmon 2012). Here, the behavior of a single judge cost RIM more than half a billion dollars. In this setting, it is no surprise that patent trolls hope to get rich quickly.",
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+      "text": "r invalidated by the court \u2014 but RIM did not get its money back (Salmon 2012). Here, the behavior of a single judge cost RIM more than half a billion dollars. In this setting, it is no surprise that patent trolls hope to get rich quickly.\n\nIt is easier to list the main social welfare implications of the tradeoff between costs of legal monopoly and incentives to patent holders than it is to calculate their magnitudes. Still, the provisional evidence we have suggests that the net welfare effects of the current patent system could easily be negative. It is somewhat conventional to think of welfare losses from distortions as small, with the idea that welfare triangles due to monopoly power are small being the paradigmatic case in point. Unfortunately, monopolies have no incentive to avoid large social losses even when the private gains are small. Witness, for example, the fact that patented pharmaceutical products often sell for hundreds of times the marginal cost of production, as some astonishing pricing differences between the US and the European markets show. Most revealing is the empirical study of the Quinolones family of drugs (Chaudhuri, Goldberg, and Gia 2006) . It measures the economic consequences of the introduction of pharmaceutical patents for this family of drugs and concludes that the consequence of patent protection to India will be nearly $ 300 million in welfare losses \u2014 while the gain to the pharmaceutical companies will be less than $ 20 million. $^5$\n\n4 Texas Instruments is such an important source of litigation that empirical work on patent litigation usually uses a dummy variable for TI. Empirical studies of the importance of firms no longer doing business in an industry to litigation can be found in Bessen and Meurer (2005) and Hall and Ziedonis (2007).\n\n5 Although the focus of this paper is on patents rather than copyright, it is worth noting that most of the copyright wars revolve around measures to prevent piracy, empirically a relatively minor factor as far as profits of media corporations are concerned (see for example Sinha, Machado, and Sellman 2010; Danaher, Dhanasobhon, Smith, and Telang 2010; Sanchez 2012).\n\nMichele Boldrin and David K. Levine 13",
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+      "text": "s profits of media corporations are concerned (see for example Sinha, Machado, and Sellman 2010; Danaher, Dhanasobhon, Smith, and Telang 2010; Sanchez 2012).\n\nMichele Boldrin and David K. Levine 13\n\n## Pharmaceuticals\n\nThis brings us to the controversial issue of drug patents. The standard argument says: No patents, no drugs. The total cost of developing a new drug, including failures, is quickly approaching the $ 1 billion mark (DiMasi, Hansen, and Grabowski 2003) . So how can anyone, faced with such a gigantic fixed cost and a microscopic marginal cost of reproduction, innovate without the protection of patents? But consider the following facts: Under current law, the chemical formula and the efficacy of the cure as established by clinical trials are made available to competitors essentially for free. About 80 percent of the initial fixed cost of drug development comes from Stage III clinical trials, a public good that legislation requires be privately produced. The downstream social cost of monopoly pricing of pharmaceutical products is highest for life-saving drugs, and the cost of monopoly pricing of other pharmaceutical products is also quite high. Given all this, various economists, such as Kremer and Williams (2009) , have argued that if government intervention is indeed needed in this market, a system of prizes might be superior to the existing system of monopolies.",
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+      "text": "ntervention is indeed needed in this market, a system of prizes might be superior to the existing system of monopolies.\n\nThere are four things that should be born in mind in thinking about the role of patents in the pharmaceutical industry. First, patents are just one piece of a set of complicated regulations that include requirements for clinical testing and disclosure, along with grants of market exclusivity that function alongside patents. Second, it is widely believed that in the absence of legal protections, generics would hit the market side by side with the originals. This assumption is presumably based on the observation that when patents expire, generics enter immediately. However, this overlooks the fact that the generic manufacturers have had more than a decade to reverse-engineer the product, study the market, and set up production lines. Lanjouw's (1998) study of India prior to the recent introduction of pharmaceutical patents there indicates that it takes closer to four years to bring a product to market after the original is introduced \u2014 in other words, the first-mover advantage in pharmaceuticals is larger than is ordinarily imagined. Third, much development of pharmaceutical products is done outside the private sector; in Boldrin and Levine (2008b) , we provide some details. Finally, the current system is not working well: as Grootendorst, Hollis, Levine, Pogge, and Edwards (2011) point out, the most notable current feature of pharmaceutical innovation is the huge \u201c drought \u201d in the development of new products.\n\nWith these four factors in mind, it is possible to make proposals for reforming the pharmaceutical industry along with the patent system. For example, we could either treat Stage II and III clinical trials as public goods (where the task would be financed by National Institutes of Health, who would accept bids from firms to carry out this work) or by allowing the commercialization of new drugs\u2014at regulated prices equal to the economic costs of drugs\u2014if they satisfy the Food and Drug Administration requirements for safety even if they do not yet satisfy the current (overly demanding) requisites for proving efficacy. In other words, pharmaceutical companies would be requested to sell new drugs at \u201ceconomic cost\u201d until efficacy is proved, but they could start selling at market prices after that. (It is ensuring\n\n14 Journal of Economic Perspectives",
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+      "text": "ther words, pharmaceutical companies would be requested to sell new drugs at \u201ceconomic cost\u201d until efficacy is proved, but they could start selling at market prices after that. (It is ensuring\n\n14 Journal of Economic Perspectives\n\nthe efficacy\u2014not the safety\u2014of drugs that is most expensive, time-consuming, and difficult.) In this way, companies would face strong incentives to conduct or fund appropriate efficacy studies where they deem the potential market for such drugs to be large enough to bear the additional costs. The new policy could begin with drugs aimed at rare diseases, which, because of their small potential market, are not currently worth the costs of efficacy testing; without the new policy, they might never make it to market at all. If this new progressive approval approach works for rare diseases, it could be adopted across the board. Our broader point is that, rather than just ratcheting up patent protection, there are a number of moves we could make to reduce the risks and cost of developing new drugs.",
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+      "text": "ber of moves we could make to reduce the risks and cost of developing new drugs.\n\n## The Political Economy of Patents\n\nWe do believe, along with many of our colleagues, that a patent system designed by impartial and disinterested economists and administered by wise and incorruptible civil servants could serve to encourage innovation. In such a system, very few patents would ever be awarded: only those for which convincing evidence existed that the fixed costs of innovation were truly very high, the costs of imitation were truly very low, and demand for the product was really highly inelastic. (The curious reader may check Boldrin and Levine, 2008a, for a more detailed explanation as to why these three conditions need to be satisfied to make a patent socially valuable). There is little dispute, among these same colleagues, that the patent system as it exists is very far from satisfying such requirements and it is, in fact, broken. To quote a proponent of patents, Shapiro (2007): \u201cA growing chorus of scholars and practitioners are expressing concerns about the operation of the US patent system. While there is no doubt that the US economy remains highly innovative, and there is no doubt that the patent system taken as a whole plays an important role in spurring innovation, the general consensus is that the US patent system is out of balance and can be substantially improved.\u201d Actually, we believe the evidence is clear that the patent system taken as a whole does not play an important role in spurring innovation. But if a well-designed and welladministered patent system could serve the intended purpose, why not reform it instead of abolishing it?\n\nTo answer the question we need to investigate the political economy of patents: why has the political system resulted in the patent system we have? Our argument is that it cannot be otherwise: the \u201coptimal\u201d patent system that a benevolent economist\u2013dictator would design and implement is not of this world. It is of course fine to recommend patent reform. But if political economy pressures make it impossible to accomplish that reform, or if they make it inevitable that the patent system will fail to meet its goals, then abolition\u2014preferably by constitutional means as was the case in Switzerland and the Netherlands prior to the late nineteenth century\u2014is the proper solution. This political economy logic brings us to advocate dismantlement of the patent system.\n\nThe Case Against Patents 15",
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+      "text": "onal means as was the case in Switzerland and the Netherlands prior to the late nineteenth century\u2014is the proper solution. This political economy logic brings us to advocate dismantlement of the patent system.\n\nThe Case Against Patents 15\n\nThe political economy of patent protection is shaped by many players, but \u201cconsumers\u201d are not prominent among them. On one side, the side of the potential patentees, there are individual inventors, corporate inventors, and patent trolls. Other players include the patent office, the patent lawyers who file and litigate patents, and the courts where the litigation takes place. The rules of the game are established by some combination of legislation, judicial action, and custom. But because patenting is a technical subject about which few voters know anything with clarity, interests of voters are not well represented. In many spheres of government regulation, this lack of representation for voters has often led to \u201cregulatory capture\u201d\u2014as Stigler (1971) and other public choice theorists have argued\u2014where regulators act in the interests of the regulated, not the broader public. Nowadays, if there is one \u201cregulator\u201d who is captured, it is the one in charge of regulating patents. To understand why, we need to understand the motivation and incentives of the relevant players.\n\nLet us start with the US Patent Office and the infamous \u201cone-click\u201d patent #5960411 issued to Amazon in September 1999. According to 35 U.S.C. 103, the statute under which the Patent Office operates, to obtain a patent \u201cthe differences between the subject matter sought to be patented and the prior art are such that the subject matter as a whole would have been not obvious at the time the invention was made to a person having ordinary skill in the art to which said subject matter pertains . . .\u201d Now consider the patent in question, which claims, among other things, a monopoly over:\n\n11. A method for ordering an item using a client system, the method comprising: displaying information identifying the item and displaying an indication of a single action that is to be performed to order the identified item; and in response to only the indicated single action being performed, sending to a server system a request to order the identified item whereby the item is ordered independently of a shopping cart model and the order is fulfilled to complete a purchase of the item.",
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+      "text": "ion being performed, sending to a server system a request to order the identified item whereby the item is ordered independently of a shopping cart model and the order is fulfilled to complete a purchase of the item.\n\nThe idea of taking a single action to accomplish a goal is hardly innovative, and applying the idea of taking a single action to making a purchase is obvious to anybody who has ever used a soft drink machine. Purchases were already being made over the Internet in 1999. It was thus clear that orders would be made by a credit card, and either the credit card information would be provided at the time of the transaction, or stored in advance by the retailer. Either way, the user must identify itself when the purchase is made. Those obvious steps are exactly what Amazon describes in its patent, albeit with a few flow charts thrown into the eleven-page patent application. But through the fog of those flow charts, it is relatively easy to see that the verbal description of the single-click procedure applies equally well to what happens on the Amazon site and to what happens in front of millions of vending machines every day. The Amazon patent was reexamined by the US Patent Office starting in May 2006. After a preliminary finding that, indeed, \u201cobvious\u201d means \u201cobvious\u201d even\n\n16 Journal of Economic Perspectives\n\nat the Patent Office, the office then reversed itself and in October 2007, reaffirmed the Amazon patent, albeit limiting its scope slightly. So we cannot dismiss such an absurd patent as an aberration.\n\nWhat lead the US Patent Office to interpret, essentially, the words \u201cnot obvious\u201d as meaning \u201cobvious\u201d? The Patent Office is constantly under pressure from applicants and their lawyers to be more generous in issuing patents\u2014that is, to adopt lower standards of obviousness and steeper standards for what is considered \u201cprior art.\u201d The following statement by David Kappos (2010), director of the US Patent Office concerning the allowance rate\u2014what fraction of patents are accepted\u2014is revealing: \u201cOverall in FY 2010, the allowance rate increased to 45.6%, compared to an allowance rate of 41.3% in FY 2009 . . . So, while we still have a lot of work to do, I think we are on the right path.\u201d Apparently, accepting a higher fraction of patents applications is defined as \u201cthe right path.\u201d Talk about \u201cregulatory capture\u201d!",
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+      "text": ". . . So, while we still have a lot of work to do, I think we are on the right path.\u201d Apparently, accepting a higher fraction of patents applications is defined as \u201cthe right path.\u201d Talk about \u201cregulatory capture\u201d!\n\nPatent lawyers play a large role in the political economy of patents. According to Quinn (2011), who is a patent attorney, legal fees for filing a patent run upwards of $7,000 and roughly half are rejected. In 2010, according to the US Patent Office, 244,341 patents were issued, which would imply roughly $3 billion in legal fees per year. Obviously, patent attorneys as a group have a tremendous incentive to see that more patents are issued. This insight helps us understand better the role of the courts and their relatively recent reform. In 1982\u2014lobbied by patent lawyers\u2014 Congress passed the Federal Courts Improvement Act, which moved federal patent appeals out of the regular court system to a special court system for dealing with patents. Naturally, many of the judges for this new court were chosen from the ranks of patent attorneys. For example, when a court voted, in a 1994 decision, to expand the scope of patents to software (In re Kuriappan P. Alappat, Edward E. Averill and James G. Larsen 33 F.3d 1526 [July 29, 1994]), of the six judges who voted in favor, half had previously been patent attorneys, while of the two that voted against, neither had been. The referee of the patent game is biased both materially and ideologically. As Landes and Posner (2004, p. 26) write in their discussion of the political economy of patents: \u201cThat has been the experience with the Federal Circuit; it has defined its mission as promoting technological progress by enlarging patent rights.\u201d\n\nNotice, too, that many patent lawsuits have a public goods aspect. Consider a case in which the plaintiff is asserting that its patent has been infringed. If the plaintiff wins the lawsuit, by confirming its monopoly position it appropriates all the benefits of winning the lawsuit. A victory by the defendant, by contrast, benefits partly itself, but also other firms that might be sued by the plaintiff for patent infringement as well as consumers who would have a more competitive market. Thus, the defendant receives only a slice of the overall benefits from winning the lawsuit, and will be willing to spend less on such lawsuits than it would if it were to receive all the benefits. This dynamic is nothing but the patent court version of the (already noted) fundamental asymmetry in the distribution of economic incentives that defines the foundations of the political economy of patent law.",
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+      "text": "to receive all the benefits. This dynamic is nothing but the patent court version of the (already noted) fundamental asymmetry in the distribution of economic incentives that defines the foundations of the political economy of patent law.\n\nFinally, political economy can be influenced by how standard terminology frames a problem. Landes and Posner (2004) point out that there is an \u201cideological\u201d\n\nMichele Boldrin and David K. Levine 17\n\nargument in support of stronger patent rights: supporters of free markets tend to favor institutions of private property, and patents and copyright are intellectual \u201cproperty.\u201d Hence, strengthening them is ideologically and politically consistent with the general principle that \u201cprivate property is good for growth.\u201d But as we (Boldrin and Levine 2008b) and many others elsewhere have argued, patents are just a monopoly, not property.\n\nGiven this set of players and their incentives, the patent game moves naturally towards its equilibrium, as we have observed over time. Two centuries or so ago, patents were restricted in their areas of applicability and limited in both depth and duration over time; they were somewhat \u201creasonable,\u201d to the extent social gains and costs seemed balanced. But we have witnessed a steady process of enlargement and strengthening of patent laws. At each stage, the main driving force was the rent-seeking efforts of large, cash-rich companies unable to keep up with new and creative competitors. Patent lawyers, patent officials, and wannabe patent trolls usually acted as foot soldiers. While this political economy process is pretty straightforward in broad terms, we are still missing an empirical, quantitative analysis of the stakes involved and of the gains and losses accruing to both the active players and to the rest of society, from the general public to the innovators that never emerged due to preexisting patent barriers.\n\nPerhaps surprisingly, despite the key importance of political economy in understanding why we have the patent system we have, economists have had relatively little to say on the subject. The few prominent papers that we know of on this subject typically build from analyses very similar to what we have presented here\u2014but then shy away from drawing the logical conclusions.",
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+      "text": "y on the subject. The few prominent papers that we know of on this subject typically build from analyses very similar to what we have presented here\u2014but then shy away from drawing the logical conclusions.\n\nFor example, Landes and Posner (2004) recognize that patent laws are mostly designed by interest groups keen to increase their monopoly rents, not aggregate welfare, and that this drove the enormous growth in patent legislation and judiciary activity during the last 30 years. The more elaborate writing by Scherer (2009) on \u201cThe Political Economy of Patent Policy Reform in the United States\u201d follows a similar approach. It focuses on the fact that \u201cgovernment emphasis on patent systems increased\u201d while academic research was starting to become more and more aware that patents are playing a minor positive role, if any at all, in creating incentives for high R&D and in fostering productivity growth. After providing a concise and very well-informed historical survey of all major changes in US patent policies over the last century or so, Scherer (p. 195) wonders why the political system would increase patent protection so much in light of the fact \u201cthat the record of debates on the enabling bill contains no solid evidence that the change would in fact stimulate R&D, and that there is no evidence of an acceleration in company-financed R&D between the 27 years before the bill was enacted and the 18 years thereafter.\u201d He then extends the same argument to the international arena, paying particular attention to the case of pharmaceutical patents. While Scherer\u2019s language and arguments are strongly critical of current trends in patents, he does not seek to explain why an institution, such as the patent system, that was supposed to be theoretically sound would degenerate into something so socially damaging over same 30-year\n\n18 Journal of Economic Perspectives\n\nperiod that academic researchers were realizing the institution's limitations and potential dangerousness.",
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+      "text": "cially damaging over same 30-year\n\n18 Journal of Economic Perspectives\n\nperiod that academic researchers were realizing the institution's limitations and potential dangerousness.\n\nIn our view, even insightful writers such as Landes and Posner (2004) and Scherer (2009) seem unable to shake themselves free of the belief that patents are essential in fostering innovation and that any problems can be fixed with some tweaks to the patent system; they fail to seriously consider the possibility of intrinsic problems with the design of the institution itself. This belief in patents flies in the face of the structural realities: Marginal extensions of patents result in substantially higher per capita rents for the few holders of the right while marginally reducing the individual welfare of the much larger number of nonpatent holders. The rent of the monopolist is a lot higher than an individual consumer's deadweight loss, so the monopolist has an incentive to perpetuate the system while the individual consumer has no incentive to fight it. Those who possess a patent do not hold a \u201cproperty right\u201d in the conventional sense of that term, but they do hold a socially granted \u201cmonopoly\u201d right, and will tend to leverage whatever initial rents their monopoly provides in order to increase their monopoly power until all potential rents are extracted (and, in all likelihood, also largely dissipated by the associated lobbying and transaction costs). This scenario helps explain how patents interact with the industry lifecycle\u2014why patents are either ignored or scarcely used in new and competitive industries, while being highly valued and overused in mature and highly concentrated ones.",
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+      "text": "s are either ignored or scarcely used in new and competitive industries, while being highly valued and overused in mature and highly concentrated ones.\n\n## Conclusion\n\nIn 1958, the distinguished economist Fritz Machlup in testimony before Congress famously said: \u201cIf we did not have a patent system, it would be irresponsible, on the basis of our present knowledge of its economic consequences, to recommend instituting one. But since we have had a patent system for a long time, it would be irresponsible, on the basis of our present knowledge, to recommend abolishing it.\u201d A proposal to abolish patents may seem \u201cpie in the sky.\u201d Certainly, many interim measures could be taken to mitigate the damage caused by the current system: for example, properly enforcing the standard that patents should only be granted for nonobvious insights; requiring genuine disclosure of working methods in patents (the opposite of certain recent \u201cprotectionist\u201d proposals to institute secret patents); and allowing an \u201cindependent invention\u201d defense against claims of patent infringement. But why use band-aids to staunch a major wound? Economists fought for decades\u2014ultimately with considerable success\u2014to reduce restrictions on international trade. A similar approach, albeit less slow, should be adopted to phase out patents. Because policy proposals are often better digested and metabolized in small bites, here is our list of small reforms that could be easily implemented.\n\n- 1) Patents are time limited, which makes it relatively easy to phase them out by\nphasing in ever shorter patent durations. This conservative approach also\n\nThe Case Against Patents 19\n\nhas the advantage that if reducing patent terms indeed has a measurable effect on innovation, the process can be reversed.\n\n2) Stop the rising tide that, since the early 1980s, has extended the set of what can be patented and has shifted the legal and judicial balance substantially in favor of patent holders.\n\n3) Because competition fosters productivity growth, antitrust and competition policies should seek to limit patents when they are hindering innovation. This policy may be of particular relevance for high-tech sectors, from software to bioengineering, to medical products and pharmaceuticals.",
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+      "text": "icies should seek to limit patents when they are hindering innovation. This policy may be of particular relevance for high-tech sectors, from software to bioengineering, to medical products and pharmaceuticals.\n\n4) Current international trade negotiations that affect patents often occur as part of either the Agreement on Trade-Related Aspects of Intellectual Property Rights ( TRIPS ), which was signed in 1995 as part of the World Trade Organization negotiations, or as part of the World Intellectual Property Organization, an agency of the United Nations. The nature of these agreements and organizations is well indicated by the use of the propaganda term \u201cintellectual property\u201d in their titles. In both cases, these talks are often focused on how to prevent ideas from high-income countries from being used in low-income countries\u2014what we would characterize as essentially a neomercantilist approach toward free trade in goods and ideas. We should be highly cautious about this agenda. Within a couple of decades, the \u201cbalance of trade in ideas\u201d between the US and European economies and emerging economies in Asia might easily equalize or reverse. Engaging in \u201cmercantilism of ideas\u201d may seem favorable to certain large US firms now, but such rules may become costly to the US economy if they are applied to protect patents held in the future by producers in the now-developing Asian economies.\n\n5) If the US economy is to have patents, we may want to start tailoring their length and breadth to different sectoral needs. Substantial empirical work needs to be done to implement this properly, although a vast legal literature is already pointing in this direction.\n\n6) Patents should not be granted based only on technological insights, but should also take economic evidence into account. For example, if an invention is easy to copy or has a high fixed cost, then patent protection to provide an incentive for the inventor may be more suitable. Ultimately, patents should be awarded only when strictly needed on economic grounds, as spelled out earlier.\n\n7) We advocate returning to the rule prior to the Bayh \u2013 Dole Act of 1980 according to which the results of federally subsidized research cannot lead to patents, but should be available to all market participants. This reform would be particularly useful for encouraging the dissemination of innovation and heightening competition in the pharmaceutical industry.",
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+      "text": "not lead to patents, but should be available to all market participants. This reform would be particularly useful for encouraging the dissemination of innovation and heightening competition in the pharmaceutical industry.\n\n8) In several industries, notably pharmaceuticals, it would be useful to rethink all of the government policies that bear on incentives for invention. The broad point is that there are a number of ways to reduce the risks and cost of developing new drugs, rather than just trying to ratchet up patent protection.\n\n20 Journal of Economic Perspectives\n\nIn general, public policy should aim to decrease patent monopolies gradually but surely, and the ultimate goal should be the abolition of patents. After six decades of further study since Machlup's testimony in 1958 has failed to find evidence that patents promote the common good, it is surely time to reassess his conclusion that it would be irresponsible to abolish the patent system. The patent system arose as a way to limit the power of royalty to award monopolies to favored individuals; but now its primary effect is to encourage large but stagnant incumbent firms to block innovation and inhibit competition.\n\n- \u25a0 We are grateful to the editors, the referees, and to Richard Stallman for a careful reading\nand comments.",
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+      "text": "\u25a0 We are grateful to the editors, the referees, and to Richard Stallman for a careful reading\nand comments.\n\n## References\n\nAghion, Phillipe, Nick Bloom, Richard Blundell, Rachel Griffith, and Peter Howitt. 2005. \u201cCompetition and Innovation: An Inverted-U Relationship.\u201d Quarterly Journal of Economics 120(2): 701\u2013728.\n\nBoldrin, Michelle, Juan Correa Allamand, David K. Levine, and Carmine Ornaghi. 2011, \u201cCompetition and Innovation.\u201d In Cato Papers on Public Policy , Vol. 1, edited by J. A. Miron, 109\u2013172. Cato Institute.\n\nBoldrin, Michele, and David K. Levine. 2004. \u201cRent Seeking and Innovation.\u201d Journal of Monetary Economics 51(1): 127\u201360.\n\nBoldrin, Michele, and David K. Levine. 2005. \u201cThe Economics of Ideas and Intellectual Property.\u201d Proceedings of the National Academy of Sciences 102(4): 1252\u201356.\n\nBoldrin, Michele, and David K. Levine. 2008a. \u201cPerfectly Competitive Innovation.\u201d Journal of Monetary Economics 55(3): 435\u201353.\n\nBoldrin, Michele, and David K. Levine. 2008b. Against Intellectual Monopoly. Cambridge University Press.\n\nBessen, James, and Michael J. Meurer. 2005. \u201cThe Patent Litigation Explosion.\u201d BU School of Law Working Paper 05\u201318, Boston University.\n\nBessen, James, and Michael J. Meurer. 2008. Patent Failure: How Judges, Bureaucrats, and Lawyers Put Innovators at Risk. Princeton University Press.\n\nBrec, Eric. 2008. \u201cNIHilism and Other Innovation Poison.\u201d MSDN Blogs, November 1. http:// blogs.msdn.com/b/eric_brechner/archive /2008/11/01/nihilism-and-other-innovation -poison.aspx.\n\nChaudhuri, Shubham, Pinelopi K. Goldberg, and Panie Gia. 2006. \"Estimating the Effects of Global Patent Protection in Pharmaceuticals: A Case Study of Quinolones in India.\" American Economic Review 96(5): 1477\u20131514.\n\nCohen, Wesely M., Richard R. Nelson, and John P. Walsh. 2000. \"Protecting Their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or Not).\" NBER Working Paper 7552.\n\nCorrea, Juan A. 2012. \u201cInnovation and Competition: An Unstable Relationship.\u201d Journal of Applied Econometrics 27(1): 160\u201366.\n\nDanaher, Brett, Samita Dhanasobhon, Michael D. Smith, and Rahul Telang. 2010. \u201cConverting Pirates without Cannibalizing Purchasers: The Impact of Digital Distribution on Physical Sales\n\nMichele Boldrin and David K. Levine 21\n\nand Internet Piracy.\" March 3. Available at SSRN: http://ssrn.com/abstract=1381827 or http://dx .doi.org/10.2139/ssrn.1381827.\n\nDiMasi, Joseph A., Ronald W. Hansen, and Henry G. Grabowski. 2003. \"The Price of Innovation: New Estimates of Drug Development Costs.\" Journal of Health Economics 22(2): 151\u201385.",
+      "chunk_id": "00013_W3124020986_coarse_0030",
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+      "text": "ssrn.com/abstract=1381827 or http://dx .doi.org/10.2139/ssrn.1381827.\n\nDiMasi, Joseph A., Ronald W. Hansen, and Henry G. Grabowski. 2003. \"The Price of Innovation: New Estimates of Drug Development Costs.\" Journal of Health Economics 22(2): 151\u201385.\n\nGallini, Nancy T. 2002. \"The Economics of Patents: Lessons from Recent U.S. Patent Reform.\" Journal of Economic Perspectives 16(2): 131-154.\n\nGates, Bill. 1991. \"Challenges and Strategy.\" Memo, Microsoft Corporation, May 16. http:// www.std.com/obi/Bill.Gates/Challenges.and .Strategy.\n\nGrootendorst, Paul, Aidan Hollis, David K. Levine, Thomas Pogge, and Aled M. Edwards. 2011. \u201cNew Approaches to Rewarding Pharmaceutical Innovation.\u201d CMAJ: Canadian Medical Association Journal 183(6): 681\u201385.\n\nHall, Bronwyn H., and Rosemarie Ham Ziedonis. 2007. \"An Empirical Analysis of Patent Litigation in the Semiconductor Industry.\" http://citeseerx.ist .psu.edu/viewdoc/summary?doi=10.1.1.69.5271.\n\nHashmi, Aamir Rafique. 2011. \u201cCompetition and Innovation: The Inverted-U Relationship Revisited.\u201d Available at SSRN: http://ssrn.com /abstract=1762388 or http://dx.doi.org/10.2139 /ssrn.1762388.\n\nHeller, Michael. 2008. The Gridlock Economy: How Too Much Ownership Wrecks Markets, Stops Innovation, and Costs Lives. Basic Books.\n\nHong, Sungook. 2001. Wireless: from Marconi's Black-Box to the Audion. MIT University Press.\n\nJaffe, Adam B. 2000. \"The U.S. Patent System in Transition: Policy Innovation and the Innovation Process.\" Research Policy 29(4-5): 531-57.\n\nJovanovic, Boyan, and Glenn M. MacDonald. 1994. \"The Life Cycle of a Competitive Industry.\" Journal of Political Economy 102(2): 322-47.\n\nKanwar, Sunil, and Robert Evanson. 2001. \u201cDoes Intellectual Property Protection Spur Technological Change?\u201d Levine\u2019s Working Paper Archive, no. 122247000000000455.\n\nKappos, David. 2010. \"Reflections on the USPTO Dashboard.\" Director's Forum: David Kappo's Public Blog, October 13. http://www.uspto .gov/blog/director/entry/reflections_on_the _uspto_dashboard.\n\nKremer, Michael, and Heidi Williams. 2009. \u201cIncentivizing Innovation: Adding to the Toolkit.\u201d In Innovation Policy and the Economy , Vol. 10, edited by Josh Lerner and Scott Stern, 1\u201317. Chicago University Press.\n\nLandes, William M., and Richard A. Posner. 2004. Political Economy of Intellectually Property Law. Washington, DC: AEI-Brookings Joint Center for Regulatory Studies.\n\nLanjouw, Jean O. 1998. \"The Introduction of Pharmaceutical Product Patents in India: Heartless Exploitation of the Poor and Suffering?\" NBER Working Paper 6366.",
+      "chunk_id": "00013_W3124020986_coarse_0031",
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+      "text": "Washington, DC: AEI-Brookings Joint Center for Regulatory Studies.\n\nLanjouw, Jean O. 1998. \"The Introduction of Pharmaceutical Product Patents in India: Heartless Exploitation of the Poor and Suffering?\" NBER Working Paper 6366.\n\nLerner, Josh. 2002. \"Patent Protection and Innovation over 150 Years.\" http://www.epip.eu /papers/20030424/epip/papers/cd/papers _speakers/Lerner_Paper_EPIP_210403.pdf (quotes are from this version). Abridged version published in 2002 as \"150 Years of Patent Protection,\" American Economic Review 92(2): 221-25.\n\nLerner, Josh. 2009. \"The Empirical Impact of Intellectual Property Rights on Innovation: Puzzles and Clues.\" American Economic Review 99(2): 343-48.\n\nLevin, Richard C., Alvin K. Klevorick, Richard R. Nelson, and Sidney G. Winter. 1987. \"Appropriating the Returns from Industrial Research and Development.\" Brookings Papers on Economic Activity, no. 3, Special Issue on Microeconomics, pp. 783\u2013820.\n\nLlanes, Gast\u00f3n, and Stefano Trento. 2009. \u201cPatent Policy, Patent Pools, and the Accumulation of Claims in Sequential Innovation.\u201d Economic Theory 50(3): 703\u201325.\n\nMachlup, Fritz. 1958. \u201cAn Economic Review of the Patent System.\u201d Study commissioned by the Senate Judiciary Subcommittee on Patents, Trademarks, and Copyrights, 85th Congress, 2nd session. http://mises.org/document/1182/.\n\nNiccolai, James. 2012. \"Android Developers Ignored Sun Patents, Google Exec Testifies.\" Computerworld, May 9.\n\nNuvolari, Alessandro. 2004. \"Collective Invention during the British Industrial Revolution: The Case of the Cornish Pumping Engine.\" Cambridge Journal of Economics 28(3): 347\u201363.\n\nNuvolari, Alessandro. 2006. \"The Making of Steam Power Technology: A Study of Technical Change during the British Industrial Revolution.\" Journal of Economic History 66(2): 472-76. Cambridge University Press.\n\nPonce, Carlos J. 2007. \"More Secrecy ... More Knowledge Disclosure? On Disclosure Outside of Patents.\" Levine's Working Paper Archive, no. 122247000000001600.\n\nQuinn, Gene. 2011. \"The Cost of Obtaining a Patent in the US.\" IPWatchdog.com, January 28. http://www.ipwatchdog.com/2011/01/28/the -cost-of-obtaining-patent/id=14668/.\n\nSalmon, Felix. 2012. \"Why Patent Trolls Don't Need Valid Patents.\" March 4. Reuters. http:// blogs.reuters.com/felix-salmon/2012/03/04 /why-patent-trolls-dont-need-valid-patents/.\n\nSanchez, Julian. 2012. \"How Copyright Industries Con Congress.\" Posted at Cato@Liberty, http://www.cato-at-liberty.org/how-copyright -industries-con-congress/.\n\n22 Journal of Economic Perspectives\n\nScherer, F. M. 1990. Industrial Market Structure and Economic Performance. Houghton Mifflin Company.",
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+      "text": "ess.\" Posted at Cato@Liberty, http://www.cato-at-liberty.org/how-copyright -industries-con-congress/.\n\n22 Journal of Economic Perspectives\n\nScherer, F. M. 1990. Industrial Market Structure and Economic Performance. Houghton Mifflin Company.\n\nScherer, F. M. 2009. \"The Political Economy of Patent Policy Reform in the United States.\" Journal on Telecommunications and High Technology Law 7(2):167-216.\n\nShapiro, Cark. 2007. \"Patent Reform: Aligning Reward and Contribution.\" NBER Working Paper 13141.\n\nShulman, Seth. 2003. Unlocking the Sky: Glenn Hammond Curtiss and the Race to Invent the Airplane. Harper Perennial.\n\nSinha, Rajiv K., Fernando S. Machado, and Collin Sellman. 2010. \"Don't Think Twice, It's All Right: Music Piracy and Pricing in a DRM-Free Environment.\" Journal of Marketing 74(2): 40\u201354.\n\nStigler, George J. 1956. \"Industrial Organization and Economic Progress.\" In The State of the Social Sciences, edited by Leonard D. White, 269-82. University of Chicago Press.\n\nStigler, George J. 1971. \"The Theory of Economic Regulation.\" Bell Journal of Economics and Management Science 2(1): 3-21.\n\nSvensson, Peter. 2006. \u201cLong-Running Blackberry Patent Battle Ends with $612.5 Million Settlement.\u201d The Daily Reporter (Associated Press), March 4. http://news.google.com/newspapers? nid=1907&dat=20060304&id=5bVGAAAAIBAJ& sjid=0_0MAAAAIBAJ&pg=4540,273762.\n\nUS Central Intelligence Agency. n.a. The 1990 CIA World Fact Book. Available from Project Gutenberg: https://ia700401.us.archive.org/32/items /the1990ciaworldf00014gut/world12.txt.",
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+      "text": "# THE PRIVATE AND SOCIAL COSTS OF PATENT TROLLS\n\nBoston University School of Law Working Paper No. 11-45 (September 19, 2011) Revision of November 9, 2011\n\nJames Bessen Boston University School of Law\n\nJennifer Ford Boston University School of Law\n\nMichael J. Meurer Boston University School of Law\n\nThis paper can be downloaded without charge at:\n\nhttp://www.bu.edu/law/faculty/scholarship/workingpapers/2011.html\n\nElectronic copy available at: http://ssrn.com/abstract=1930272\n",
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+      "text": "available at: http://ssrn.com/abstract=1930272\n\n\n# The Private and Social Costs of Patent Trolls\n\nVersion: November 2011\n\nBy James Bessen, Jennifer Ford and Michael J. Meurer*\n\nAbstract: In the past, non-practicing entities (NPEs) \u2014 firms that license patents without producing goods \u2014 have facilitated technology markets and increased rents for small inventors. Is this also true for today's NPEs? Or are they \u201c patent trolls \u201d who opportunistically litigate over software patents with unpredictable boundaries? Using stock market event studies around patent lawsuit filings, we find that NPE lawsuits are associated with half a trillion dollars of lost wealth to defendants from 1990 through 2010, mostly from technology companies. Moreover, very little of this loss represents a transfer to small inventors. Instead, it implies reduced innovation incentives and a net loss of social welfare.\n\nKeywords: patent, litigation, litigation cost, non-practicing entities, software patents\n\nJEL Classifications: 031, 034, K41\n\n*Boston University School of Law. Thanks to Colleen Chien, Dennis Crouch and Michael Risch for comments. Thanks to research assistance from Tim Layton, data from Patent Freedom and some support from the Coalition for Patent Fairness. A version of this working paper will be published in Regulation.\n\nContact: jbessen@bu.edu\n\nElectronic copy available at: http://ssrn.com/abstract=1930272\n\n2-Troll - 10/11\n",
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+      "text": "ll be published in Regulation.\n\nContact: jbessen@bu.edu\n\nElectronic copy available at: http://ssrn.com/abstract=1930272\n\n2-Troll - 10/11\n\n\n## Executive Summary\n\nFirms that license patents without producing goods\u2014\u201c non-practicing entities\u201d (NPEs)\u2014 have historically facilitated technology markets and increased the profits that small inventors earn from their inventions.\n\nBut a self-described new crop of NPEs has emerged that asserts patents and litigates them on an unprecedented scale, involving thousands of defendants every year in hundreds of lawsuits. Do these litigating NPEs improve markets for technology and increase incentives for small inventors? Or are they \u201cpatent trolls\u201d who exploit weaknesses in the patent system?\n\nThis paper makes several findings about this litigation. First, by observing what happens to a defendant's stock price around the filing of a patent lawsuit, we are able to assess the effect of the lawsuit on the firm's wealth, after taking into account general market trends and random factors affecting the individual stock. We find that NPE lawsuits are associated with half a trillion dollars of lost wealth to defendants from 1990 through 2010. During the last four years the lost wealth has averaged over $ 80 billion per year. These defendants are mostly technology companies who invest heavily in R & D. To the extent that this litigation represents an unavoidable business cost to technology developers, it reduces the profits that these firms make on their technology investments. That is, these lawsuits substantially reduce their incentives to innovate.\n\nSecond, by exploring publicly listed NPEs, we find that very little of this loss of wealth represents a transfer to inventors. This suggests that the loss of incentives to the defendant firms is not matched by an increase in incentives to other inventors.\n\nThird, the characteristics of this litigation are distinctive: it is focused on software and related technologies, it targets firms that have already developed technology, and most of these lawsuits involve multiple large companies as defendants. These characteristics suggest that this litigation exploits weaknesses in the patent system. In our book Patent Failure , we argue that patents on software and business methods are litigated much more frequently because they have \u201c fuzzy boundaries. \u201d The scope of these patents is not clear, they are often written in vague language, and technology companies cannot easily find them and understand what they claim. It appears that much of the NPE litigation takes advantages of these weaknesses.",
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+      "text": "\u201d The scope of these patents is not clear, they are often written in vague language, and technology companies cannot easily find them and understand what they claim. It appears that much of the NPE litigation takes advantages of these weaknesses.\n\nWe conclude that the loss of billions of dollars of wealth associated with these lawsuits harms society. While the lawsuits increase incentives to acquire vague, over-reaching patents, they decrease incentives for real innovation overall.\n\nElectronic copy available at: http://ssrn.com/abstract=1930272\n\n3-Troll - 10/11",
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+      "text": "stract=1930272\n\n3-Troll - 10/11\n\n## 1 Introduction\n\nIn 2010, operating companies in the US found themselves in lawsuits initiated by nonpracticing entities (NPEs) more than 2,600 times, over five times more often than in 2004 (Patent Freedom 2011). Is this a good thing or a bad thing?\n\nNPEs are firms that do not produce goods, rather they acquire patents in order to license them to others. $^1$ In principle, NPEs can perform the socially valuable function of facilitating markets for technology. Some inventors lack the resources and expertise needed to successfully license their technologies or, if necessary, to enforce their patents. NPEs provide a way for these inventors to earn rents that they might not otherwise realize, thus providing them with greater incentives to innovate. For example, economic historians find evidence of a robust market for technology during the nineteenth century that allowed individual inventors to earn returns on their inventions in the era before the rise of the large R & D laboratories (Lamoreaux and Sokoloff 1999). $^2$ Optimists argue that the current crop of NPEs perform a similar function and should not be discouraged (Hosie 2008, McDonough 2006, Shrestha 2010, Myhrvold 2010, Morgan 2008).\n\nOn the other hand, the recent surge in NPE-related litigation may be more insidious. Critics, including many technology firms, compare these NPEs to the mythical trolls who hide under bridges built by other people, unexpectedly popping up to demand payment of tolls (see, for example, Temple 2011). The critics call these NPEs \u201cpatent trolls,\u201d claiming that they buy up vaguely worded patents that can be construed to cover established technologies and use them opportunistically to extract licensing fees from the real innovators. Indeed, there has been a general and dramatic rise in patent litigation that some analysts attribute to rapid growth in the number of patents with unclear or unpredictable boundaries (Bessen and Meurer 2008, FTC\n\n1A wide variety of non-practicing firms engage in patent markets including patent brokers, consultants, auctioneers, and more (see Yanagisawa and Guellec 2009 for an overview). Our focus is on non-practicing firms that assert and litigate patents.\n\n2 See also Magliocca (2007) about less socially beneficial activities of nineteenth century NPEs.\n\n4-Troll - 10/11",
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+      "text": "anagisawa and Guellec 2009 for an overview). Our focus is on non-practicing firms that assert and litigate patents.\n\n2 See also Magliocca (2007) about less socially beneficial activities of nineteenth century NPEs.\n\n4-Troll - 10/11\n\n2011) . To the extent that the recent NPEs opportunistically assert \u201cfuzzy patents\u201d against real technology firms, they can decrease the incentives for these firms to innovate. Innovators deciding to invest in new technology have to consider the risk of inadvertent infringement as a cost of doing business. This risk reduces the rents they can expect to earn on their investment and hence decreases their willingness to invest..\n\nUsing empirical evidence, this paper investigates the effect of the current crop of NPE litigation on innovation incentives and on social welfare. We begin by estimating the private losses to publicly listed companies who are defendants in NPE patent litigation by measuring the reaction of the defendant firm's share price during the days following the filing of the lawsuit. $^3$ Using a database of patent lawsuits collected by Patent Freedom (2011), we perform 4,114 of these event studies from 1990 through 2010. In theory, investors respond to the news of a lawsuit filing by reducing their expectations of future earnings for the defendant firm. This reduction should reflect all the costs the firm faces from the suit, including lost business, fees paid to settle the case, etc., depending on how investors expect the suit to be resolved. Investors also consider the loss or delay of profits from future opportunities. The total change in expected profits is reflected by a drop in the share price.\n\nOf course, other events also affect the share price on any given day, including events that affect the market generally and idiosyncratic events that affect the firm being studied. We use standard methods to control for the effect of the market and we average over a large number of lawsuits to filter out random idiosyncratic price changes. This allows us to estimate the average percentage change in the defendant's stock price for each lawsuit filing and the change in market capitalization of outstanding common stock. Aggregating the change in market capitalization over two decades, we find that the aggregate loss of wealth to these firms exceeds half a trillion dollars. Over the last four years, the loss of wealth exceeds $ 83 billion per year. It is possible, of\n\n3 In this paper, we use the term \"defendant\" to refer to the firm against which the NPE is asserting a patent. In some cases, this firm will technically be the plaintiff in a legal action seeking a declaratory judgment.\n\n5-Troll- 10/11",
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+      "text": "ble, of\n\n3 In this paper, we use the term \"defendant\" to refer to the firm against which the NPE is asserting a patent. In some cases, this firm will technically be the plaintiff in a legal action seeking a declaratory judgment.\n\n5-Troll- 10/11\n\ncourse, that the stock market initially overreacts to news of a lawsuit filing, possibly making our estimates overstated. We present evidence below to argue that this does not likely bias our results significantly.\n\nThis private loss might seem surprisingly large, but it does not necessarily mean that this litigation harms society. The effect on society depends on two considerations. First, there is a static effect on net social welfare. To the extent that litigation involves socially wasteful activity, such as a diversion of firm resources from production to litigation support, it reduces social welfare. Such activity implies a \u201c deadweight \u201d loss. On the other hand, to the extent that the losses just represent transfers of wealth from one party to another \u2014 perhaps from large defendants to independent inventors \u2014 then the static effect on social welfare could be neutral.\n\nSecond, there is a dynamic effect: this litigation could increase or decrease innovation incentives overall, thus affecting future social welfare. The large private losses seem to imply a disincentive for the defendants, who are largely technology firms after all. But perhaps transfers to the patent holders constitute a positive incentive to them that more than compensates for the disincentives imposed on the defendant firms. Then the dynamic effect could be to increase innovation incentives overall.\n\nSome general evidence leans against such an optimistic evaluation. The literature on litigation commonly finds that the loss of wealth experienced by defendants is, in fact, largely a deadweight social loss; little of it flows to the plaintiffs (Bhagat and Romano 2002) . Moreover, the large magnitude of lost wealth in these patent cases seems hard to reconcile with a story of transfers to independent inventors \u2014 in recent years the losses comprise a significant fraction of total US R & D spending. If these losses were offset by massive transfers to independent inventors, we think we would have heard or read reports documenting this bonanza and a corresponding surge in research activities by small inventors. There is little evidence that NPE litigation has produced massive transfers to independent \u2013 or any other sort of \u2013 inventor.\n\n6-Troll - 10/11",
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+      "text": "this bonanza and a corresponding surge in research activities by small inventors. There is little evidence that NPE litigation has produced massive transfers to independent \u2013 or any other sort of \u2013 inventor.\n\n6-Troll - 10/11\n\nNevertheless it is helpful to look specifically at evidence of the wealth actually transferred to NPEs and to inventors as a result of NPE litigation. Using the financial statements of publicly listed NPE firms, we obtain upper bound estimates on these transfers. We find that relatively little of the wealth lost by defendant firms shows up as a transfer to NPEs and relatively little of the funds flowing to NPEs is transferred to outside inventors. It appears that there are a lot of big losers in NPE litigation and few beneficiaries.\n\nThese findings allow us to draw some conclusions about the effect of the recent surge in NPE litigation on markets for technology, how the current crop of NPEs are different from those in the past, and how this affects innovation incentives.",
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+      "text": "different from those in the past, and how this affects innovation incentives.\n\n### 1.1 Literature Review\n\nVarious sorts of NPEs have long played an important role in technology markets (see Arora et al. 2004). For example, Arora (1997) documents the pivotal role that specialized engineering firms play in the refining and petrochemical industries by licensing their technology. Several commentators have argued that today's NPEs play a similar role in facilitating markets (McDonough 2006, Hosie 2008, Morgan 2008, Myhrvold 2010). It is crucial to note, however, that the firms studied by Arora provided valuable technological information as well as patent and trade secret licenses to licensees. It appears that the current crop of NPEs usually offers naked patent licenses after the technology in question has already been developed (FTC 2011). Little empirical evidence has been advanced to show whether today's NPEs are providing enhanced incentives to small inventors or whether NPE litigation is inhibiting innovation.\n\nWhat evidence we have supports the view that today's NPE are different from the specialized engineering firms operating in chemical industries. Consider the following distinctive aspects of current NPE litigation:\n\n- 1. The scale of litigation. While Ball and Kesan (2008) show that NPEs accounted for\n\n7-Troll - 10/11\n\nonly about 5 % of patent litigation in 2000-2002, Chien finds (2009) that NPEs account for 17 % of high tech patent lawsuits. Patent Freedom (2011) finds that NPEs account for 16 % of all patent lawsuits in 2009. This amounts to hundreds of lawsuits per year.\n\n2. Many of these lawsuits involve multiple defendants (Chien 2009), making the effective impact greater. The lawsuits involve thousands of defendants per year.\n\n3. Much of this litigation concerns software patents, including business process patents. Chien finds that 90 % of the high tech NPE lawsuits involve software or finance patents. Allison et al. (2010) study patents litigated multiple times and find that software patents account for 94 % of the lawsuits.",
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+      "text": "t 90 % of the high tech NPE lawsuits involve software or finance patents. Allison et al. (2010) study patents litigated multiple times and find that software patents account for 94 % of the lawsuits.\n\n4. These lawsuits tend to happen long after the initial patent application. Allison et al. (2009) find that the patents in these lawsuits are much more likely to have multiple continuing applications, allowing for claims to be modified long after the initial application. Risch (2012) finds that the mean NPE lawsuit occurs 8 years after the patent was issued. $^4$ Love (2010) finds that NPEs are far more likely to enforce old patents than practicing entities. The long delays suggest that in many cases these patents are not asserted until other firms actually develop the technology.\n\nThese findings suggest that today's NPEs are distinct in some ways, however, that does not really tell us much about their effect on innovation. Shrestha (2010) compares the characteristics of patents in NPE lawsuits to a sample of other patents (see also Allison et al. 2009, Risch 2012, Fischer and Henkel 2011). Finding, for example, that NPE patents receive more citations than other patents, Shrestha concludes that many NPEs hold \u201chigh value\u201d patents and are therefore good for innovation. $^5$ Unfortunately, this conclusion does not logically follow. While it is true that higher value patents tend to receive more citations, this is a rather weak\n\n4 And this underestimates the lag because it only considers lawsuits filed by 2010.\n\n5 Shrestha also looks at non-self citations and indices of originality and generality.\n\n8 - Troll - 10/11\n\ncorrelation and many factors other than value can influence citations received, including selfcitations (Bessen 2008) . This correlation does not imply that NPE litigated patents are more valuable just because they have more citations. $^6$ Moreover, even if these patents are valuable, it is important to remember that the ultimate question is whether or not enforcement of these patents provides a net incentive for innovation. $^7$ This paper looks at the actual transfer of wealth to inventors from NPE patent litigation.",
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+      "text": "ate question is whether or not enforcement of these patents provides a net incentive for innovation. $^7$ This paper looks at the actual transfer of wealth to inventors from NPE patent litigation.\n\nShrestha also looks at win rates for those lawsuits that do proceed to a final judgment, finding that NPEs have similar win rates to other patent plaintiffs. Based on this, Shrestha concludes that these lawsuits are not \u201cfrivolous.\u201d However, this finding is based on a very small sample and the lawsuits that proceed to final judgment are not necessarily representative of all of the lawsuits filed. Moreover, Risch (2012) finds much higher rates of invalidation of NPE patents brought to judgment (54 % had no valid claims while an additional 44 % had some invalid claims). Allison et al. (2010) look at win rates for a larger sample of the most-litigated patents and find that plaintiff win rates are much lower than for other patent litigation. But even so, this does not directly measure how harmful the litigation is to innovation or to social welfare. Using extensive event studies, this paper measures the private losses that result from NPE litigation and relates this to possible social losses.\n\nThe event study methodology has been used before to study litigation, beginning with Cutler and Summers (1988) in the context of litigation over a merger. Several papers have performed event studies of patent litigation, both the event of the initial filing and the terminating event (settlement, judgment or verdict), including small sample studies by Bhagat, et al. (1994), Lerner (1995), Bhagat et al. (1998), Lunney (2004), Haslem (2005), and a large sample study by\n\n6 In effect, Shrestha is arguing: A) Valuable patents receive higher citations, and, B) NPE litigated patents receive higher citations, therefore, C) NPE litigated patents are valuable patents. This is a classic logical fallacy.\n\n7 Broad patents that can be credibly asserted against valuable technologies might have enormous private value and at the same time negative social value when they are not disclosed until after the technology was independently developed, and especially when they face a significant risk of invalidity. Such patents might attract a large number of citations, and might also retard innovation.\n\n9-Troll - 10/11\n\nBessen and Meurer (2007). None of these studies looked specifically at NPE litigation.",
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+      "text": "icant risk of invalidity. Such patents might attract a large number of citations, and might also retard innovation.\n\n9-Troll - 10/11\n\nBessen and Meurer (2007). None of these studies looked specifically at NPE litigation.\n\n## 2 Data and Methods\n",
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+      "text": "s\n\n\n### 2.1 Data Sources\n\nThe data for this research comes from two primary sources. The first source is an extensive database of NPE lawsuits generously provided by Patent Freedom, an organization devoted to researching and providing information on NPE behavior and activities. Patent Freedom defines a non-practicing entities as companies that \u201c do not practice their inventions in products or service, or otherwise derive a substantial portion of their revenues from the sale of products and services in the marketplace. Instead, NPEs seek to derive the majority of their income from the enforcement of patent rights. \u201d Since we study litigation, we only focus on those NPEs who file lawsuits ( \u201c patent assertion entities \u201d ).\n\nThe second data source is the Center for Research in Security Prices (CRSP) US Stock Database, a comprehensive collection of security information. Using these sources, a sample comprised of all instances in which a known NPE sued a publicly traded firm between 1990 and October 2010 was constructed. This was done by first matching defendant names with a previously constructed list of public domestic firms and subsidiaries using a software program, and then manually reviewing the resulting list and updating matches that had been either missed by or incorrectly assigned by the software. To assess the validity and coverage of the matches, a random sample of 100 parties was manually checked using corporate websites and CRSP's Company Code Lookup tool. For this sample, while 11 % of parties that were either public companies or their subsidiaries were left unmatched, there were no false positives.\n\nThis process yielded a sample of 1,630 lawsuits filed by a NPE against one or more publicly listed defendants. Because many of these lawsuits were filed against multiple defendants, the total number of events in the sample was substantially higher than the number of\n\n10 - Troll - 10/11\n\nsuits, at 4,114 (for the sample using a 5 day window to measure the returns).\n\nFinally, we linked the data in our sample to Compustat and to data from Derwent Litalert to obtain information on firm characteristics and patents involved in the lawsuits. We also used financial information on publicly listed NPEs from Compustat.\n",
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+      "text": "ata in our sample to Compustat and to data from Derwent Litalert to obtain information on firm characteristics and patents involved in the lawsuits. We also used financial information on publicly listed NPEs from Compustat.\n\n\n### 2.2 Estimating Cumulative Abnormal Returns\n\nTo estimate the impact of a lawsuit filing on the value of a firm, we use event study methodology (see Mackinlay 1997 for a review). In particular, we use the dummy variable method described by Michael Salinger (1992). 8 This assumes that stock returns follow a market model,\n\n$$ (1)  \\quad r_{t}=\\alpha+\\beta r_{t}^{m}+\\epsilon_{t}$$\n\nwhere $r_t$ is the return on a particular stock at time $t$ , $\\frac{m}{r_t}$ is the compounded return on a market portfolio, and $\\epsilon_t$ is a stochastic error. If an event, such as a lawsuit filing, occurs on day $T$ , then there may be an \u201c abnormal return \u201d to the particular stock on that day. This can be captured using a dummy variable,\n\n$$ (2)  \\quad r_{t}=\\alpha+\\beta r_{t}^{m}+\\delta I_{t}+\\epsilon_{t}$$\n\nwhere $I_t$ equals 1 if $t{=}T$ and 0 otherwise. Equation (2) can be estimated using OLS for a single event. In practice, this equation is estimated over the event period and also over a sufficiently long pre-event window. In this paper we use a 200 trading-day pre-event window. The coefficient estimate of $\\delta$ obtained by this procedure is then an estimate of the abnormal return on this particular stock. For different stocks, the precision of the estimates of $\\delta$ will vary depending on how well equation (2) fits the data. The estimated coefficient variance from the regression\n\n8 Salinger shows that this model is mathematically equivalent to the OLS market model described in Brown and Warner (1985) and widely used.\n\n11 - Troll - 10/11\n\nprovides a measure of the precision of the estimate of the abnormal return.\n\nWe want to obtain a representative estimate of the abnormal returns from lawsuit filings for multiple stocks, under the assumption that these represent independent events and that they share the same underlying \u201c true \u201d mean. Previous papers estimating abnormal returns from patent lawsuits have simply reported unweighted means for the group of firms. Although the unweighted mean is an unbiased estimator, it is not efficient. Since we are concerned with obtaining the best estimate to use in policy calculations (and not just testing the sign of the mean), we use a weighted mean to estimate the \u201c average abnormal return, \u201d where the weight for each observation is proportional to the inverse of the variance of the estimate of $\\delta$ for that firm. $^9$",
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+        "The Private and Social Costs of Patent Trolls",
+        "2 Data and Methods",
+        "2.2 Estimating Cumulative Abnormal Returns"
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+      "text": "ot just testing the sign of the mean), we use a weighted mean to estimate the \u201c average abnormal return, \u201d where the weight for each observation is proportional to the inverse of the variance of the estimate of $\\delta$ for that firm. $^9$\n\nWhen we test our means against the null hypothesis that the true mean is zero, we report both the significance of $t$ -tests using the weighted mean and also the significance of the $Z$ statistic (see Dodd and Warner 1983), a widely used parametric test of significance that incorporates the variation in precision across events. $^10$ In any case, the significance test results are closely similar as are those of some non-parametric tests.\n\nFinally, (2) describes the abnormal return for a single day. It is straightforward to design dummy variables to estimate a \u201ccumulative abnormal return\u201d (CAR) over an event window consisting of multiple consecutive days. In the following, for instance, if the suit is filed on date $t{=}T$ , then we may use a window from day $T{-}1$ to $T{+}4$ .",
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+      "text": "filed on date $t{=}T$ , then we may use a window from day $T{-}1$ to $T{+}4$ .\n\n## 3 Empirical Findings\n",
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+      "text": "s\n\n\n### 3.1 Summary statistics\n\nSome characteristics of defendant firms in our sample are reported in Table 1. These are, on average, large firms. Almost two thirds of the firms are technology firms, including software\n\n9 In any case, we find that for our entire sample, the weighted mean is quite close to the unweighted mean and also to the median.\n\n10 The Z statistic is a joint test of the individual firm t-tests. We use a robust version described in Kramer (2001).\n\n12 - Troll - 10/11\n\nand communications firms, and these firms, on average, spend a lot on R & D and have very substantial intangible assets. A significant number of financial, retail and wholesale firms are also represented. And these firms are typically subject to multiple NPE lawsuits.\n\nTable 2 shows that most of the NPE disputes involve multiple defendants, either in the same suits or from multiple suits filed by the NPE on the same day. $^11$ The number of publicly listed defendants mostly range between two and nine defendants (median of 5). Only 17 % of the defendants were the sole defendant listed. This contrasts sharply with other patent litigation where 85 % of defendants are solo (Bessen and Meurer 2007).\n\nAnother difference is the distribution of these patents across technology classes. Looking at the main patent listed in Derwent, about 62 % of the patents are software patents, using the technology class categorization used in Bessen (2011). Using the NBER categorization (Hall et al. 2001), 75 % of the patents are in computer and communications technology. Thus this sample shows the same concentration of NPE litigation in software and related technologies as in earlier studies. Both this technological concentration and the prevalence of multiple defendants are important for interpreting the nature of the current crop of NPEs.\n",
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+        "The Private and Social Costs of Patent Trolls",
+        "3 Empirical Findings",
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+      "text": "ologies as in earlier studies. Both this technological concentration and the prevalence of multiple defendants are important for interpreting the nature of the current crop of NPEs.\n\n\n### 3.2 Estimates of cumulative abnormal returns\n\nTable 3 reports basic estimates of cumulative abnormal returns (CARs) for the sample of NPE defendants. Columns 1 and 2 report the weighted mean (with standard error) and median values. The first row shows the results using a five day event window that starts one day before the lawsuit filing and continues through the fourth day after. The mean loss is 0.32 % and the median loss is 0.52 % .\n\nOne concern is that this estimate of lost value might reflect a temporary over-reaction on the part of investors. Given that there are now hundreds of these troll lawsuits every year, it is\n\n11 The numbers are also high if we restrict the defendants to the same suit filings.\n\n13 - Troll - 10/11\n\nhard to understand why investors would consistently over-react and never learn from their mistakes. Nevertheless, a persistent over-reaction would be noticed by arbitrageurs who would then come in, buy the artificially low stock and thus drive the price up to a more accurate level. If it took some time for arbitrageurs to enter, the price we observe during the five day event window might be artificially low, making our estimate of losses too high.\n\nOne way to check this is to look at a longer event window to see if the stock showed evidence of recovery over the subsequent month or so. The second row reports results for a comparable analysis using a 25 day window. If it took some time before wiser investors arbitraged the stock, then we should see some evidence of a price correction within this longer window. Instead, the CARs in this row are slightly larger (more negative) than those in the five day window. This suggests that the initial loss of wealth was not an overreaction by investors that was subsequently corrected, at least not within 25 days. Because the longer window has larger standard errors as a result of the measurement technique, we use the sample with the five day event window for most of the remaining analysis.",
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+        "3 Empirical Findings",
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+      "text": "ot within 25 days. Because the longer window has larger standard errors as a result of the measurement technique, we use the sample with the five day event window for most of the remaining analysis.\n\nPerhaps, instead, the stock price stays artificially low until the lawsuit is resolved. This might be the case if investors react to the uncertainty of the lawsuit, demanding a higher return on investment until the uncertainty is resolved. If this were the case, then we should see an increase in the stock price at the announcement that the suit was settled. However, two event studies of lawsuit settlements find no such positive correction on average, suggesting that investors overall appear to anticipate settlement correctly, pricing it in to the share value. $^12$ Thus this theory, too, seems difficult to reconcile with the evidence. While we accept the idea that investors do not always act rationally, we have found no explanation consistent with the evidence for why investors should persistently over-react to lawsuit filings.\n\nThe estimated CARs are substantially smaller than those found in the study of all patent\n\n12 Haslem (2005) finds a statistically significant decrease in the stock price on settlement. Bhagat et al. (1998) find a CAR that is not significantly different from zero.\n\n14 - Troll - 10/11\n\nlawsuits involving publicly listed firms from 1984 to 1999 by Bessen and Meurer (2007). The third row shows the CARs for defendant firms from that study and the fourth row shows the CARs from solo defendant firms in that study. We parse out the results in the fourth row to provide the most relevant comparison to the NPE lawsuits in this study. Most NPE lawsuits in our current study have multiple defendants (83 % ). Most of the lawsuits in our earlier studied involved a single defendant (85 % ); we suspect that almost all of those lawsuits do not involve an NPE plaintiff. The mean CAR for all single-defendant lawsuits is nearly twice as large as the mean CAR reported for the five day window in the NPE sample. This difference is also statistically significant. $^13$\n\nThe NPE CARs are also much smaller than those reported in the previous literature on patent litigation event studies. For example, Bhagat et al. (1998) study 33 defendants of patent lawsuits announced in the Wall Street Journal. They find a mean CAR of -1.50 % , nearly five times larger than the estimate here. Studying 26 biotech firms, Lerner (1995) found a 2.0 % reduction in the wealth of the defendants and plaintiffs combined.",
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+      "text": "in the Wall Street Journal. They find a mean CAR of -1.50 % , nearly five times larger than the estimate here. Studying 26 biotech firms, Lerner (1995) found a 2.0 % reduction in the wealth of the defendants and plaintiffs combined.\n\n### 3.3 Why do NPE lawsuits cause smaller percentage losses?\n\nOne clear reason that the NPE lawsuits have lower CARs than in previous studies is that the sample of defendants in the NPE lawsuits is very different from the samples in the earlier studies. Some of those studies found much larger losses but used highly select small samples of lawsuits that had been announced in the Wall Street Journal or Dow Jones News Service. Bessen and Meurer (2007) show that patent lawsuits announced in the Wall Street Journal tended to involve companies with greater capital per employee and higher stock market betas. These factors might be directly related to larger percentage losses on the announcement of a lawsuit.\n\nThe large sample of lawsuits involving publicly listed firms in Bessen and Meurer (2007)\n\n13 Using one-tailed t-tests, allowing unequal variances between the sub-groups and calculating the degrees of freedom using Satterthwaite's approximation (1946), P = .070.\n\n15 - Troll - 10/11\n\nwere not necessarily announced, but these, too, show larger percentage losses than in the current sample of NPE lawsuits, although not so much larger. The NPE sample of public firms differs from that sample in two important ways: NPE lawsuits tend to involve larger defendants and multiple defendants.\n\nAlthough larger defendants tend to have smaller CARs (Bessen and Meurer 2007), size related differences cannot directly explain much of the difference in the CARs between the samples. The difference in the CARs between small and large firms is simply not large enough to account for the difference in the NPE sample and these small firms only make up 14 % of the NPE sample in any case. $^14$",
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+      "text": "l and large firms is simply not large enough to account for the difference in the NPE sample and these small firms only make up 14 % of the NPE sample in any case. $^14$\n\nNevertheless, the large size of the defendants in the NPE lawsuits and the fact that so many of these lawsuits involve multiple defendants changes the economics of litigation in an important way: in these circumstances, litigation might still be credible for plaintiffs who have a low probability of winning. A lawsuit only poses a credible threat if the plaintiff's expected gains from winning exceed the costs from litigating. The expected gains are the ex ante probability of winning times the conditional benefits of winning. Normally, a lawsuit with a low probability of winning does not pose a credible threat. However, when a patent has a chance of being interpreted broadly so that it reads on the business of multiple large companies, the payoff to winning might be so large that the threat of a lawsuit is credible even if the probability of winning is low.\n\nThis provides another possible explanation for lower percentage losses found in NPE lawsuits: the plaintiffs in a substantial portion of NPE lawsuits might have low probabilities of winning at court, hence these lawsuits will cause smaller losses to defendants, all else equal. Because many of these suits might involve aggressive interpretations of patent scope, allowing the claims to read on many defendants, they might have lower probabilities of winning, but still\n\n14 In an unreported result from the 2008 study, the mean CAR for solo defendants that had more than 500 employees was -.56% (.18%), just slightly smaller than the return listed in the fourth row of Table 3.\n\n16 - Troll - 10/11\n\nprovide credible threats because of the multiple defendants. This explanation is supported by Allison et al. (2011) who find that NPE suits with multiple defendants are more likely to settle and, when they do go to trial, the plaintiffs are much more likely to lose (but see Shrestha 2010). This explanation is thus plausible, however, our evidence for it is not conclusive.",
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+      "text": "to settle and, when they do go to trial, the plaintiffs are much more likely to lose (but see Shrestha 2010). This explanation is thus plausible, however, our evidence for it is not conclusive.\n\n### 3.4 Loss of wealth\n\nNevertheless, just because the percentage loss of defendant firms is smaller in NPE lawsuits, this does not imply that the loss of wealth is small. Using the CAR estimates, we can calculate the loss of wealth that occurs upon a lawsuit filing. Columns 4 and 5 of Table 3 show the mean and median loss of wealth calculated by multiplying the mean CAR by each firm's capitalization. $^15$ The mean wealth lost per lawsuit is $ 122 million in 2010 dollars and the median loss is $ 20.4 million. These figures are substantially higher than the previous estimates for patent lawsuits of all types found by Bessen and Meurer (2007), shown in row 3. These estimates are, of course, much larger than the direct costs of legal fees. They also include the costs of lost business, management distraction and diversion of productive resources that might result from the lawsuit, possible payments needed to settle the suit, and the reduction in expectations of profits from future opportunities that are forestalled or foreclosed because of the suit.\n\nInvestors' expectation of future profits are notoriously volatile. To the extent that one might want to gauge the effect of the lawsuits on current profits while excluding expectations about future profits, it is possible to make some crude adjustments to the above figures. One method is to divide the estimated loss of wealth by the ratio of the market capitalization of the\n\n15 We could, alternatively, calculate the average by summing the estimated loss from each suit, however, that\n\n$$\\frac{1}{N}\\sum_{i=1}^N(r+e_i)x_i$$ where $N$ is the procedure would provide a less efficient estimate. This alternative estimator is number of firms, $r$ is the true CAR, $e$ is the error in measuring the $i$ th firm's CAR, and $x$ is the $i$ th firm's market $$\\frac{1}{N}\\left(r+\\frac{\\sum_{i=1}^N e_i}{N}\\right)\\sum_{i=1}^Nx_i$$. It is straightforward to show that both are unbiased but that the latter has smaller variance assuming that $e$ and $x$ are uncorrelated.\n\n17 - Troll - 10/11",
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+        "3 Empirical Findings",
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+      "text": "{\\sum_{i=1}^N e_i}{N}\\right)\\sum_{i=1}^Nx_i$$. It is straightforward to show that both are unbiased but that the latter has smaller variance assuming that $e$ and $x$ are uncorrelated.\n\n17 - Troll - 10/11\n\nfirm's common stock divided by the value of the firm's capital assets. $^16$ This reduces the mean wealth lost to $ 112 million in 2010 dollars. Alternatively, the loss can be divided by the ratio of the total market value of the firm to the value of the firm's capital assets, reducing the mean loss to $ 64 million in 2010 dollars. These figures are also quite substantial and, although investors' expectations of future profits might occasionally be \u201cexuberant,\u201d our basic estimate nevertheless captures the actual loss of wealth related to the lawsuit.\n\nThus although the NPE CARs are lower than the CARs for other lawsuits, the mean loss per lawsuit is larger because the market capitalization of the NPE defendants is that much larger. This, combined with the tendency of NPE lawsuits to involve multiple defendants means that these suits have an outsized impact on firm wealth. Aggregating over the sample (column 6), shows that NPE lawsuits from 1990 through October 2010 are responsible for over half a trillion dollars in lost wealth (in 2010 dollars). From 2007 through October 2010, the losses average over $ 83 billion per year in 2010 dollars, over a quarter of US industrial R & D spending per annum. Moreover, because this total is only for publicly listed firms, it likely understates the true loss of wealth resulting from NPE lawsuits.\n\nWhatever the theoretical and historical role of NPEs might be in facilitating markets for technology, it is clear that the current crop of NPE litigation is responsible for an unprecedented loss of wealth. The next section looks at whether this private loss of wealth to the defendants is also a loss to society or not.",
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+      "text": "n is responsible for an unprecedented loss of wealth. The next section looks at whether this private loss of wealth to the defendants is also a loss to society or not.\n\n### 3.5 Transfers\n\nAs discussed in the Introduction, these private losses might or might not correspond to social losses. Litigation incurs static social losses when it involves socially wasteful activity. Aside\n\n16 For the capital assets, we use the inflation-adjusted value of the aggregate sum of accounting assets and R&D. For details on the computation of these quantities, see Bessen (2009). This adjustment implicitly gives the amount of investment that would be needed to restore the firm to its value before the lawsuit. The alternative calculation assumes that the lawsuit does not reduce the market value of the firm aside from the firm's common stock.\n\n18 - Troll - 10/11\n\nfrom direct legal fees, litigation often involves a diversion of management resources away from productive activity. It may also involve a loss of consumer welfare. For example, preliminary injunctions can shut down production and sales while the litigation pends. Even without a preliminary injunction, customers may stop buying a product. And the threat of final injunction might require the defendant to drastically rework its product or even abandon it. Frequently, products require customers to make complementary investments; they may not be willing to make these investments if a lawsuit poses some risk that the product will be withdrawn from the market. Furthermore, patent owners can threaten customers and suppliers with patent lawsuits because patent infringement extends to every party who makes, uses, or sells a patented technology without permission, and sometimes to those who participate indirectly in the infringement.\n\nThese social losses might be offset if NPE litigation acts like an investment in a reputation for toughness that deters future piracy. We doubt this is the case. There is simply no evidence that a significant number of defendants in NPE suits are pirates; later we discuss evidence showing that they are mostly inadvertent infringers. Furthermore, NPE litigation is rising over time, not declining as it should if the reputational story were true.\n\nA more important consideration is the extent to which private losses arise from transfers of wealth to other parties that do not incur a static loss of social welfare. When defendants make payments to NPEs to settle lawsuits or subsequent to legal judgments, the private loss to the defendant is not socially wasteful. To what extent do the half trillion dollars in private losses correspond to such expected transfers?",
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+        "3 Empirical Findings",
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+      "text": "en defendants make payments to NPEs to settle lawsuits or subsequent to legal judgments, the private loss to the defendant is not socially wasteful. To what extent do the half trillion dollars in private losses correspond to such expected transfers?\n\nTo explore transfers to NPEs and, in turn, transfers from NPEs to independent inventors, we assembled a list of NPE firms in our database that are publicly listed. We identified 14 firms (see list in the Appendix). These firms account for 574 litigation events in our data, about 14 % of the total. The aggregate losses to the defendants in these lawsuits from 2000 through October\n\n19 - Troll - 10/11\n\n2010 total $87.6 billion in 2010 dollars, about 17% of the total in our database.\n\nHow much of this loss represents a transfer to the NPEs? Table 4 shows the cumulative flow of several financial variables over this same time period. Total revenues over these years come to $ 7.6 billion, about 9 % of the total loss to defendants. Revenues necessarily overstate any transfers from the defendants to the NPEs because they also include revenues from firms that are not involved in litigation and from private firms. Nevertheless, it is quite clear that most of the defendants' private loss is not a transfer to NPEs.\n\nAnother possible transfer occurs to the defendant's competitors. To the extent that patent litigation causes customers to select a rival product or service, some of the lost business captured in the above calculations represents a transfer to rival firms. Of course, because the NPEs sue multiple parties, it happens frequently that a firm and its rivals are sued at the same time, so that no such transfer would occur. This provides us a simple test of the magnitude of potential transfers to rivals: if such transfers are substantial, we should see smaller CARs when a firm and its rival are sued than in cases where rivals are not sued. We identified 1,914 events (47 % of the events) where a firm was sued along with another firm in the same SIC 3-digit industry. However, the CARs for these events were slightly higher than in those cases where a rival firm was not also sued. $^17$ Thus this test is inconsistent with substantial transfers to rivals.\n\nAnother transfer occurs to the lawyers, expert witnesses, etc. involved in lawsuits. Estimates of legal costs from Bessen and Meurer (2007) suggest that these transfers cannot be more than a few percent of the loss.\n\nWe also conducted event studies of the NPE stocks around the lawsuit filings. The NPE stocks also lost wealth around the lawsuit filings. 18 Although other factors might cause a drop in the plaintiffs' market capitalizations (Bessen and Meurer 2007), this evidence is not consistent",
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+      "text": "the NPE stocks around the lawsuit filings. The NPE stocks also lost wealth around the lawsuit filings. 18 Although other factors might cause a drop in the plaintiffs' market capitalizations (Bessen and Meurer 2007), this evidence is not consistent\n\n17 The difference was 0.02% with a standard error of 0.17%.\n\n18 The mean CAR was -5.2% with a standard error of 3.1%, significantly different from zero at P = .064. A loss to plaintiffs is frequently observed in the litigation literature.\n\n20 - Troll - 10/11\n\nwith large transfers of wealth to the NPEs.\n\nIn summary, while there are some limited transfers to NPEs and to rivals and lawyers, most of the private losses incurred by defendants in NPE litigation do not appear to be transfers to other parties; presumably, most of the losses correspond to static losses of social welfare.\n\nOf course, NPE litigation might also produce dynamic gains in social welfare if transfers to independent inventors increase innovation incentives. How much of the transfer to NPEs is subsequently transferred to inventors outside of the NPEs? The investment that NPEs make in acquiring patents is included in the accounting category \u201cnet cash flow to investing activities.\u201d This figure less capital expenditures is shown in Table 4. Although this figure includes other investments in addition to payments to outside inventors, it is small compared to the defendants' losses: $ 1.7 billion, or about 2 % of the defendants' losses. The investments made in patents are also included in the NPE's intangible assets, although these quantities are amortized. The table also reports intangible assets for fiscal 2010. It is less than $ 600 million, about 1 % of the defendants' losses. Note again that both the intangible assets and the net cash flow to investing activities generate revenues from sources other than our defendants, so these figures might overstate transfers to independent inventors. In any case, we can state that less than 2 % of the defendants' losses could represent a transfer to independent inventors and quite possibly the true figure is much smaller than 2 % . $^19$\n\nSome of the NPEs also conduct their own R & D. Indeed, capitalized R & D investments are included in the intangible assets of the firm. The R & D expense flows are also not large, around 2 % of the loss.\n\nIt is likely that the R & D investments and acquisitions from outside inventors will yield value to the NPE firms beyond 2010. To the extent that this is true, all of these figures overstate the extent to which these investments are tied to the defendant losses occurring through 2010.\n\n19 Risch (2012) also finds evidence that NPE litigation does not help inventors raise funds from venture capitalists either.",
+      "chunk_id": "00024_W2166565848_coarse_0025",
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+      "paper_id": "00024_W2166565848",
+      "paper_title": "THE PRIVATE AND SOCIAL COSTS OF PATENT TROLLS",
+      "section_hierarchy": [
+        "The Private and Social Costs of Patent Trolls",
+        "3 Empirical Findings",
+        "3.5 Transfers"
+      ],
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+      "chunk_index": 25,
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+      "text": "of these figures overstate the extent to which these investments are tied to the defendant losses occurring through 2010.\n\n19 Risch (2012) also finds evidence that NPE litigation does not help inventors raise funds from venture capitalists either.\n\n21 - Troll - 10/11\n\nThat is, some portion of these investments is related to defendant losses that will be incurred after 2010, so only a portion of the investment can be attributed to a transfer of wealth from the pre-2011 defendants.\n\nAlthough the transfer to inventors are small, it is still positive. Does this mean that NPE litigation nevertheless increases innovation incentives? There are three reasons to conclude that it does not. First and foremost, the losses to technology firms who are defendants in this litigation are two orders of magnitude larger. These losses imply a very large disincentive to innovation for these firms, firms that spend heavily on R & D. Studies show that the more a firm spends on R & D, the more likely it is to be sued for patent infringement (Bessen and Meurer 2005). Moreover, very rarely are the defendants in these lawsuits found to have actually copied the patented technology (Bessen and Meurer 2008, p. 126, Cotropia and Lemley 2009). Instead, they are inadvertent infringers, if infringers at all. This means that they have to anticipate the risk of future lawsuit-related losses as part of their cost of developing new technology and products. This risk is a disincentive to invest in innovation, and our results find that it is a very large disincentive, much larger than any possible incentives provided by transfers to independent inventors via NPEs. Even if incentives to small inventors were much more fertile than incentives provided to large technology firms \u2014 producing two, three or even ten times as many innovations \u2014 the incentives flowing to small inventors would not offset the very much larger disincentives imposed on the technology firms.\n\nSecond, to the extent that independent inventors benefit by licensing or selling their inventions to large firms, this risk of inadvertent infringement reduces their innovation incentives as well. Because their prospective licensees have to anticipate the risk of an NPE lawsuit, this risk decreases the amount licensees are willing to pay. Thus the very large losses incurred by defendants tend to reduce the market for technology for independent inventors.\n\nFinally, the incentives provided to patent holders by the current crop of NPEs may be the\n\n22 - Troll - 10/11",
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+      "paper_title": "THE PRIVATE AND SOCIAL COSTS OF PATENT TROLLS",
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+        "The Private and Social Costs of Patent Trolls",
+        "3 Empirical Findings",
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+      "text": "hus the very large losses incurred by defendants tend to reduce the market for technology for independent inventors.\n\nFinally, the incentives provided to patent holders by the current crop of NPEs may be the\n\n22 - Troll - 10/11\n\nwrong kind of incentives. NPE activity may skew the research agenda of small firms away from disruptive technologies and toward mainstream technology and associated patents that can be asserted against big incumbents. Even worse, small firms are encouraged to divert investment from genuine invention toward simply obtaining broad and vague patents that might one day lead to a credible, if weak, lawsuit.\n\nTo summarize, there are a lot of big losers from NPE litigation, while hardly anyone benefits much. The defendant firms and their customers lose while patent holders gain very little by comparison. Even the investors in NPE firms have gained little \u2014 these firms barely break even based on their cumulative net income in Table 4 . Apparently, the only real beneficiaries are the lawyers and perhaps the principals of the NPE firms.",
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+        "The Private and Social Costs of Patent Trolls",
+        "3 Empirical Findings",
+        "3.5 Transfers"
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+      "text": "nly real beneficiaries are the lawyers and perhaps the principals of the NPE firms.\n\n## 4 The New Business Model\n\nThese findings should be interpreted cautiously. While there are large losses from NPE litigation, not all NPEs today are opportunistic litigators. Nor does this imply that NPEs have not played a more positive role in the past. It is important to understand what is uniquely different about the NPEs who are behind today's litigation surge.\n\nIndeed, today's NPEs tell us they are different. Proponents tell us they are a new breed of company, a new business model, that is misunderstood (McDonough 2006, Myhrvold 2010). They tell us that NPEs are, in fact, good for society because they are creating \u201ca capital market for invention\u201d by buying patents and selling licenses. This helps \u201cturbocharge technological progress\u201d \u201cby realigning market participant incentives, making patents more liquid, and clearing the patent market.\u201d\n\nWhat, exactly, is new about this business model and what does it mean for innovation? Markets for technology have been around at least since the nineteenth century and studies have documented some of the benefits of these markets (for example, Arora et al. 2004): they allow\n\n23 - Troll - 10/11\n\ninventors a way of getting money for their inventions, thus providing them with stronger incentives to invent, and they help spread new technologies to the companies who can commercialize them the best. But most of this literature concerns markets for technology , not markets for patents . There is no evidence the transactions occurring around NPE litigation involve the transfer of technology \u2014 news reports and judicial opinions indicate the defendants are already using the technology. Instead, these transactions involve just the transfer of patent rights (and money).",
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+        "The Private and Social Costs of Patent Trolls",
+        "4 The New Business Model"
+      ],
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+      "text": "reports and judicial opinions indicate the defendants are already using the technology. Instead, these transactions involve just the transfer of patent rights (and money).\n\nEven so, some advocates hold that NPEs are socially beneficial because they reduce the costs of patent transactions (McDonough 2006) . To the extent that NPEs facilitate the clearance of patent rights before firms invest in technology this is a clear benefit. The patent brokers and auctions facilitate transactions, but that is not obviously true for those NPEs who are primarily involved in asserting and litigating patents. Moreover, to the extent that these NPE transactions occur only after firms invest in technology, any savings in transaction costs has to be offset by the associated dispute costs. We have shown that the litigation losses amount to over half a trillion dollars, so these dispute costs are substantial. No reasonable estimate of the transaction costs of licensing these patents could approach the magnitude of these litigation losses.\n\nThe pattern of NPE patent litigation casts further doubt on the view that NPE patent enforcement has any connection to technology transfer. Is it possible that large numbers of innovative firms in case after case are pirating the technology disclosed in NPE patents? Why are the numbers so large? Perhaps the firms have colluded to jointly pirate the technology, or perhaps all of these firms have independently decided to pirate the same technology. Not likely. We think the plausible explanation is that the many firms who end up as defendants in these cases have independently created the invention or derived the claimed technology from some source other than the NPE patent.\n\nMultiple inadvertent infringements are especially likely for a general purpose technology\n\n24 - Troll - 10/11\n\nlike software. As noted above, NPE lawsuits are concentrated in one technology area, namely, software and software-related patents including business methods. Consequently, this litigation has a disproportionately large effect on firms working with these technologies. A thumbnail calculation suggests that NPEs account for about 41 % of patent litigation involving software patents. 20 So NPE litigation is quite significant for this technology.",
+      "chunk_id": "00024_W2166565848_coarse_0029",
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+        "4 The New Business Model"
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+      "text": "orking with these technologies. A thumbnail calculation suggests that NPEs account for about 41 % of patent litigation involving software patents. 20 So NPE litigation is quite significant for this technology.\n\nThus the new business model for NPEs is not about licensing patents in general; it is mainly about licensing software patents, including patents on business and financial processes. This is significant because we have argued elsewhere that software patent litigation has risen dramatically because of eroding patent notice and that software patents have been an important contributor to this trend (Bessen and Meurer 2008) . That is, software patents have \u201c fuzzy boundaries \u201d : they have unpredictable claim interpretation and unclear scope, lax enablement and obviousness standards make the validity of many of these patents questionable, and the huge number of software patents granted makes thorough search to clear rights infeasible, especially when the patent applicants hide claims for many years by filing continuations. This gives rise to many situations where technology firms inadvertently infringe. And this means that there is a business opportunity based on acquiring patents that can be arguably read to cover existing technologies and asserting those patents, litigating if necessary in order to obtain a licensing agreement. Models by Reitzig et al. (2007) and Turner (2011) show that the patent troll business model only makes economic sense when there is such inadvertent infringement. And the rise in NPE litigation has closely mirrored the rise in software patent litigation (Bessen 2011) . Moreover, fuzzy boundaries can explain why so many NPE lawsuits have multiple defendants: many firms may have reasonably concluded that they did not infringe or the patents were invalid or they may have been unable to find these patents while conducting a clearance search. Later,\n\n20 From Bessen (2011), about 26% of patent lawsuits involve software patents. If 17% of lawsuits involve NPEs and if 62% of NPE lawsuits involve software patents (Table 2) then .17 x .62 / .26 = 41% of software patent lawsuits are filed by NPEs.\n\n25 - Troll - 10/11\n\nthey encounter an NPE who sues over an aggressively broad interpretation of the patent's scope and validity.",
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+        "The Private and Social Costs of Patent Trolls",
+        "4 The New Business Model"
+      ],
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+      "text": "2) then .17 x .62 / .26 = 41% of software patent lawsuits are filed by NPEs.\n\n25 - Troll - 10/11\n\nthey encounter an NPE who sues over an aggressively broad interpretation of the patent's scope and validity.\n\nThus \u201c fuzzy boundaries \u201d for software and business method patents enable the rise of this new business model. Large numbers of hidden patents or patents with unpredictable boundaries provide an opportunity to extract rents from technology firms. Further, because NPEs have no operating business, technology firms cannot retaliate with countersuits. Combine this with capital markets to fund the acquisition of patents and to conduct litigation and you get a viable business model. But this is a very different business from the business pursued by those patent brokers, consultants and auctioneers who facilitate markets for technology.",
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+      "text": "sultants and auctioneers who facilitate markets for technology.\n\n## 5 Conclusion\n\nFirms that buy and license technologies can improve the market for technology and thus improve the innovation incentives for independent inventors. Patent agents and markets for technology have been an important part of the US innovation system since the nineteenth century.\n\nBut the role of the current NPEs who assert and litigate patents is something altogether different: it is focused on software and related technologies, it targets firms that have already developed technology, and it is very much about litigation, especially litigation in the special circumstances where multiple large parties can be sued at once. Whatever the general benefits of technology markets, this does not obscure the fact that this particular manifestation involves large amounts of costly litigation. It is hard to believe that markets can be somehow improved by having thousands of lawsuits that incur hundreds of billions of dollars in losses.\n\nWe have shown that defendants have lost over half a trillion dollars in wealth\u2014over $ 83 billion per year during recent years\u2014and this has not improved incentives to innovate. While the lawsuits might increase incentives to acquire vague, over-reaching patents, they do not increase incentives for real innovation. The defendants in these lawsuits are firms that already invest a lot\n\n26 - Troll - 10/11\n\nin innovation. Their losses make it more expensive for them to continue to do so and it also makes them less willing to license new technologies from small inventors. Meanwhile, independent inventors benefit very little from what the large companies lose.\n\n27 - Troll - 10/11\n",
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+      "text": "ing to license new technologies from small inventors. Meanwhile, independent inventors benefit very little from what the large companies lose.\n\n27 - Troll - 10/11\n\n\n## 6 References\n\nAllison, John R., Mark A. Lemley and Joshua Walker, 2009. \"Extreme Value or Trolls on Top? Evidence From the Most-Litigated Patents,\" University of Pennsylvania Law Review, 158, pp. 101-37.\n\nAllison, John R., Mark A. Lemley and Joshua Walker. 2010. \"Patent Quality and Settlement Among Repeat Patent Litigants,\" Georgetown Law Journal, 99, pp. 677-712.\n\nArora, Ashish, 1997. \"Patents, licensing, and market structure in the chemical industry,\" Research Policy 26, pp. 391-403.\n\nArora, Ashish, Andrea Fosfuri, and Alfonso Gambardella, 2004. Markets for Technology: The Economics of Innovation and Corporate Strategy, Cambridge, Ma.: MIT Press.\n\nBall, Gwendolyn G. & Jay P. Kesan, 2009. \"Transaction Costs and Trolls: Strategic Behavior by Individual Inventors, Small Firms and Entrepreneurs in Patent Litigation,\" Ill. Law & Econ. Papers Series, Research Papers Series No. LE09-005.\n\nBessen, James, 2008. \"The value of U.S. patents by owner and patent characteristics,\" Research Policy, 37, pp. 932-45.\n\nBessen, James, 2009. \"Estimates of Patent Rents from Firm Market Value,\" Research Policy 38, pp. 1604-16.\n\nBessen, James, 2011. \"A Generation of Software Patents,\" Boston Univ. School of Law, Law and Economics Research Paper No. 11-31.\n\nBessen, James and Michael J. Meurer. 2005. \"The Patent Litigation Explosion,\" B.U.S. L. Law and Economics Working Paper Series, No. 05-18.\n\nBessen, James and Michael J. Meurer (2006), \"Patent Litigation with Endogenous Disputes,\" American Economic Review, 96, no. 2, pp. 77-81.\n\nBessen, James and Michael J. Meurer (2007), \"The Private Costs of Patent Litigation,\" Boston Univ. School of Law Working Paper No. 07-08.\n\nBessen, James and Michael J. Meurer (2008), Patent Failure: How judges, bureaucrats and lawyers put innovators at risk, Princeton, NJ: Princeton University Press.\n\nBhagat, Sanjai, John M. Bizjak, and Jeffrey L. Coles, 1998. \"The shareholder wealth implications of corporate lawsuits,\" Financial Management 27, pp. 5-27.\n\nBhagat, Sanjai, James A. Brickley, & Jeffrey L. Coles. 1994. \"The Costs of Inefficient Bargaining and Financial Distress: Evidence from Corporate Lawsuits,\" Journal of Financial Economics, v. 35, p. 221.\n\nBhagat, Sanjai and Roberta Romano, 2002. \"Event Studies and the Law: Part I: Technique and Corporate Litigation,\" American Law and Economics Review, 4, pp. 141-167.\n\n28 - Troll - 10/11",
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+        "The Private and Social Costs of Patent Trolls",
+        "6 References"
+      ],
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+      "text": "its,\" Journal of Financial Economics, v. 35, p. 221.\n\nBhagat, Sanjai and Roberta Romano, 2002. \"Event Studies and the Law: Part I: Technique and Corporate Litigation,\" American Law and Economics Review, 4, pp. 141-167.\n\n28 - Troll - 10/11\n\nBrown, Stephen J. and Jerold B. Warner. 1985. \"Using Daily Stock Returns: The case of event studies,\" Journal of Financial Economics, v. 14, pp. 3-31.\n\nChien, Colleen, 2009. \"Of Trolls, Davids, Goliaths, and Kings: Narratives and Evidence in the Litigation of High \u2013 Tech Patents,\" North Carolina Law Review, 87, pp. 1571-1615\n\nCotropia, Christopher Anthony and Mark A. Lemley, 2009, \"Copying in Patent Law,\" North Carolina Law Review, 87, p. 1421.\n\nCutler, David and Lawrence Summers. 1988. \"The costs of conflict resolution and financial distress: Evidence from the Texaco-Pennzoil Litigation,\" RAND Journal of Economics, 19, pp. 157-72.\n\nDodd, Peter and Jerold B. Warner. 1983. \"On Corporate Governance: A study of proxy contests,\" Journal of Financial Economics, v. 11, pp. 401-38.\n\nFederal Trade Commission, 2011. \"The Evolving IP Marketplace: Aligning patent notice and remedies with competition.\"\n\nFischer, Timo and Joachim Henkel. 2011. \u201cPatent Trolls on Markets for Technology: An Empirical Analysis of Trolls\u2019 Patent Acquisitions\u201d working paper.\n\nHall, Bronwyn H., Adam B. Jaffe, Manuel Trajtenberg, 2001. \"The NBER Patent Citation Data File: Lessons, Insights and Methodological Tools,\" NBER Working Paper No. 8498.\n\nHaslem, Bruce. 2005. \"Managerial Opportunism during Corporate Litigation,\" Journal of Finance, 60, no. 4, pp. 2013-41.\n\nHosie, Spencer, 2008. \"Patent Trolls and the New Tort Reform: A Practitioner's Perspective,\" A Journal of Law & Policy for the Information Society, 4, pp. 75-87.\n\nKesan, Jay P. and Gwendolyn G. Ball. 2005. \"How Are Patent Cases Resolved? An Empirical Examination of the Adjudication and Settlement of Patent Disputes,\" U. Illinois Law & Economics Research Paper No. LE05-027.\n\nKramer, Lisa A. 2001. \"Alternative Methods for Robust Analysis in Event Study Applications,\" in Lee, C. F., ed., Advances in Investment Analysis and Portfolio Management, v. 8, pp. 109-32.\n\nLamoreaux, Naomi R., and Kenneth L. Sokoloff, 1999. \"Inventors, Firms, and the Market for Technology in the Late Nineteenth and Early Twentieth Centuries.\" In Naomi R. Lamroeaux, Daniel M. G. Raff, and Peter Temin, eds., Learning by Doing in Markets, Firms, and Countries. Chicago: University of Chicago Press, 19\u201360.\n\nLerner, Josh. 1995. \"Patenting in the Shadow of Competitors,\" Journal of Law and Economics, 38, no. 2, pp. 463-95.",
+      "chunk_id": "00024_W2166565848_coarse_0034",
+      "chunk_type": "coarse",
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+        "The Private and Social Costs of Patent Trolls",
+        "6 References"
+      ],
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+    {
+      "text": "nd Peter Temin, eds., Learning by Doing in Markets, Firms, and Countries. Chicago: University of Chicago Press, 19\u201360.\n\nLerner, Josh. 1995. \"Patenting in the Shadow of Competitors,\" Journal of Law and Economics, 38, no. 2, pp. 463-95.\n\nLove, Brian J., 2010. \"An Empirical Study of Patent Litigation Timing: Could a Patent Term Reduction Decimate Trolls Without Harming Innovators?,\" Working paper.\n\nLunney, Glynn S. Jr. 2004. \"Patent Law, the Federal Circuit, and the Supreme Court: A Quiet\n\n29 - Troll - 10/11\n\nRevolution,\" Supreme Court Economic Review, 11, pg. 1.\n\nMackinlay, A. Craig. 1997. \"Event Studies in Economics and Finance,\" Journal of Economic Literature, 35(1), pp. 13-39.\n\nMagliocca, Gerard N. 2007. \"Blackberries and Barnyards: Patent Trolls and the Perils of Innovation,\" Notre Dame Law Review, 82(5), 1809-1838.\n\nMcDonough, James F. III, 2006. \"The Myth of the Patent Troll: An Alternative View of the Function of Patent Dealers in an Idea Economy,\" Emory Law Journal 56, pp189-211.\n\nMeurer, Michael J. 1989. \"The Settlement of Patent Litigation,\" RAND Journal of Economics, Spring 1989, v. 20, iss. 1, pp. 77-91.\n\nMorgan, Marc, 2008. \"Stop Looking Under the Bridge for Imaginary Creatures: A Comment Examining Who Really Deserves The Title Patent Troll,\" Federal Circuit Bar Journal, 17, pp. 165-80.\n\nMyhrvold, Nathan, 2010. \"The Big Idea,\" Harvard Business Review, March 2010, pp. 40-50.\n\nPatent Freedom, 2011. \u201cLitigations over Time,\u201d https://www.patentfreedom.com/researchlot.html , accessed August 2011.\n\nReitzig, Markus, Joachim Henkel and Christopher Heath, 2007. \u201cOn sharks, trolls, and their patent prey\u2014Unrealistic damage awards and firms\u2019 strategies of \u2018being infringed\u2019,\u201d Research Policy 36, pp. 134\u2013154.\n\nRisch, Michael, 2012 forthcoming. \"Patent Troll Myths,\" Seton Hall Law Review, 42.\n\nSalinger, Michael. 1992. \"Standard Errors in Event Studies,\" The Journal of Financial and Quantitative Analysis 27(1), pp. 39-53.\n\nSatterthwaite, F. E. 1946. \"An approximate distribution of estimates of variance components,\" Biometrics Bulletin, 2. pp. 110-14.\n\nShrestha, Sannu K. 2011. \u201cTrolls or Market-makers? An empirical analysis of nonpracticing entities,\u201d Columbia Law Review, 110, pp. 114-60.\n\nTemple, James, 2011. \u201cTech-patent lawsuits discourage innovation,\u201d San Francisco Chronicle, 7/31/2011.\n\nTurner, John L., 2011. \"Patent Thickets, Trolls and Unproductive Entrepreneurship,\" working paper.\n\nYanagisawa, Tomoya and Dominique Guellec, 2009. \u201cThe Emerging Patent Marketplace,\u201d OECD STI Working Paper.\n\n30 - Troll - 10/11",
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+      "text": "11.\n\nTurner, John L., 2011. \"Patent Thickets, Trolls and Unproductive Entrepreneurship,\" working paper.\n\nYanagisawa, Tomoya and Dominique Guellec, 2009. \u201cThe Emerging Patent Marketplace,\u201d OECD STI Working Paper.\n\n30 - Troll - 10/11\n\n## Tables and Figures\n\nTable 1. Summary Statistics of Defendant Firms (Millions of $2010)\n\n<table><tr><td></td><td>Mean</td><td>Median</td></tr><tr><td>Revenue</td><td>34,487</td><td>13,232</td></tr><tr><td>R\\&amp;D spending</td><td>1,779</td><td>531</td></tr><tr><td>Intangible assets</td><td>9,792</td><td>1,269</td></tr><tr><td>Employees (1000s)</td><td>9.4</td><td>3.6</td></tr><tr><td>NPE lawsuits per firm (1990-2010)</td><td>26.1</td><td>12</td></tr><tr><td>Industry (2 digit SIC code)</td><td></td><td></td></tr><tr><td>Electronics (36)</td><td>22\\%</td><td></td></tr><tr><td>Machinery \\</td><td>computer equipment (35)</td><td>15\\%</td></tr><tr><td>Retail/wholesale (50-59)</td><td>15\\%</td><td></td></tr><tr><td>Software (73)</td><td>14\\%</td><td></td></tr><tr><td>Communications (48)</td><td>9\\%</td><td></td></tr><tr><td>Financial services (60-67)</td><td>8\\%</td><td></td></tr></table>\n\nMeans of firm characteristics are over 3,821 firm-events. This is a sample of publicly listed firms.\n\n31 - Troll - 10/11\n\nTable 2. Summary Characteristics of Lawsuits\n\n<table><tr><td></td><td>Mean</td><td>Median</td></tr><tr><td>No. of publicly listed defendants</td><td>15.3</td><td>5</td></tr><tr><td>Sole defendant</td><td>17\\%</td><td></td></tr><tr><td>In litigation with 10 or more defendants</td><td>32\\%</td><td></td></tr><tr><td>Software patent</td><td>62\\%</td><td></td></tr><tr><td>Patent Technology Classes (NBER)</td><td></td><td></td></tr><tr><td>Chemical</td><td>1\\%</td><td></td></tr><tr><td>Computers \\&amp; communications</td><td>75\\%</td><td></td></tr><tr><td>Drugs \\&amp; medical</td><td>1\\%</td><td></td></tr><tr><td>Electrical \\&amp; electronics</td><td>12\\%</td><td></td></tr><tr><td>Mechanical</td><td>4\\%</td><td></td></tr><tr><td>Other</td><td>8\\%</td><td></td></tr></table>\n\nNote: The number of defendants in the lawsuits are for all lawsuits filed by the same NPE on the same day. Patent characteristics are for a sub-sample matched to Derwent Litalert and are for the first patent listed in the suit. The categorization of software patents is described in Bessen (2011) . We have adapted the NBER technology classes (Hall et al. 2001) to the current technology class system adding classes 398, 715, 717, 725 and 726 to the computers and communications category. This sample consists of publicly listed firms.\n\n32 - Troll - 10/11\n\nTable 3. Cumulative Abnormal Returns (CARs) of Defendants in NPE Litigation",
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+      "text": "lass system adding classes 398, 715, 717, 725 and 726 to the computers and communications category. This sample consists of publicly listed firms.\n\n32 - Troll - 10/11\n\nTable 3. Cumulative Abnormal Returns (CARs) of Defendants in NPE Litigation\n\n<table><tr><td></td><td colspan=\"3\">Cumulative Abnormal Returns</td><td colspan=\"3\">Loss of common stock value (millions of $2010)</td><td></td></tr><tr><td rowspan=\"2\">Sample</td><td>Mean</td><td>Median</td><td>Robust Z statistic</td><td>Mean</td><td>Median</td><td>Aggregate</td><td>N</td></tr><tr><td>(1)</td><td>(2)</td><td>(3)</td><td>(4)</td><td>(5)</td><td>(6)</td><td></td></tr><tr><td>5 day event window</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>All NPE suits</td><td>-0.32\\% (0.08\\%)**</td><td>-0.52\\%</td><td>-4.01**</td><td>$122.0</td><td>$20.4</td><td>$501,775</td><td>4,114</td></tr><tr><td>25 day event window</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>All NPE suits</td><td>-0.37\\% (0.14\\%)**</td><td>-0.71\\%</td><td>-2.04*</td><td>$140.6</td><td>$23.6</td><td>$579,217</td><td>4,119</td></tr><tr><td>All patent litigation</td><td>1984-99 (Bessen and Meurer 2007)</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>All suits</td><td>-0.50\\% (0.16\\%)**</td><td>-0.51\\%</td><td>-3.24**</td><td>$75.9</td><td>$6.5</td><td></td><td>2,887</td></tr><tr><td>Single defendants</td><td>-0.61\\% (0.18\\%)**</td><td>-0.54\\%</td><td>-2.94**</td><td></td><td></td><td></td><td>2,460</td></tr></table>\n\nNote: Standard errors in parentheses. Single asterisk indicates statistical significance at the 5 % level; double asterisk indicates 1 % significance. Average cumulative abnormal returns (CARs) are weighted means, with weights proportional to the inverse of the estimated variance of each return. Event window is 5 days (T-1 to T+4) or 25 days (T-1 to T+24). Cumulative abnormal returns are estimated using OLS. The robust $Z$ statistic is a joint test of the individual firm $t$ statistics (Kramer 2001) .\n\n33 - Troll - 10/11\n\nTable 4. Wealth Transfer for Publicly Listed NPEs",
+      "chunk_id": "00024_W2166565848_coarse_0037",
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+      "text": "estimated using OLS. The robust $Z$ statistic is a joint test of the individual firm $t$ statistics (Kramer 2001) .\n\n33 - Troll - 10/11\n\nTable 4. Wealth Transfer for Publicly Listed NPEs\n\n<table><tr><td></td><td>Millions of $2010</td><td>As share of Defendants' Losses</td></tr><tr><td>Cumulative for 14 NPEs, 2000-2010</td><td></td><td></td></tr><tr><td>Revenues</td><td>$7,639</td><td>$9 \\%$</td></tr><tr><td>Net cash flow to investing activities less capital expenditures</td><td>$1,697</td><td>$2 \\%$</td></tr><tr><td>R\\&amp;D expense</td><td>$2,039</td><td>$2 \\%$</td></tr><tr><td>Net income</td><td>$258</td><td>$0 \\%$</td></tr><tr><td>Combined stock for 14 NPEs, 2010</td><td></td><td></td></tr><tr><td>Intangible assets</td><td>$562</td><td>$1 \\%$</td></tr><tr><td>Defendant firms</td><td></td><td></td></tr><tr><td>Loss of wealth</td><td>$87,574</td><td>100%</td></tr></table>\n\n34- Troll - 10/11\n\nAppendix. Public NPE firms\n\nAcacia Technologies Asure Software Burst.com Inc Decisioning.com Inc Interdigital Intertrust Technologies Corp LecTec Corp Mosaid Technologies Inc Network-1 Security Solutions Inc OPTi Inc Rambus Tessera Technologies Inc VirnetX Inc Wi-Lan",
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