From jbessen@researchoninnovation.org  Sat Feb  3 12:36:57 2001
Date: Sat, 3 Feb 2001 07:36:57 -0500
From: Jim Bessen jbessen@researchoninnovation.org
Subject: [Patents] Bessen & Maskin reply on software patent paper
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----- Original Message -----=20
From: Jim Bessen=20
To: Gregory Aharonian=20
Cc: Eric Maskin=20
Sent: Saturday, February 03, 2001 7:28 AM
Subject: reply on software patent paper


Greg,

Thanks for your comments on our Working Paper, "Sequential Innovation, =
Patents and Imitation." (We are currently revising the January 2000 =
draft.) However, our intent appears to have been miscommunicated, so =
below are some brief clarifying comments we hope you will publish:

1. Simplistic Models

We could not agree with you more that patent policy should not be based =
on overly simple economic models. But please don't blame us for this =
unfortunate development.

Fact is, for nearly 20 years U.S. patent policy has been guided by an =
overly simple model that Todd Dickinson and most patent attorneys recite =
with little provocation. It goes like this: "Without patents, =
competition from imitators deprives innovators of profits on their =
innovations. Therefore, they will not invest sufficient R&D. Patents =
provide innovators with monopoly rents (licensing fees and extra profits =
from monopoly prices). These rents encourage R&D. Stronger patents mean =
more R&D which means more innovation. Stronger patents are always =
better." This simple argument appears to be behind the subject matter =
extension of patents and the lowering of the non-obviousness standards. =
It has also been used to argue for the extension of the patent term.
=20
This common argument is what we call the "static model." We show that =
with just a few slightly more realistic assumptions (sequential =
innovation, alternative technologies), the conclusions of the model are =
turned upside down. In a more dynamic world, stronger patents may =
actually reduce innovation. Our point is not that patents are =
necessarily and always bad, but that policy should be careful and =
balanced.

Indeed, prior to the 1980s, both economic theory and legal theory took a =
balanced view, recognizing both benefits and costs to patents and =
calling for limits on patent protection. Our paper argues for a return =
to this perspective.

2. Empirical evidence on software

We do NOT argue that the explosion in software patents has stifled =
innovation in software generally. We would hardly argue that the =
software industry as a whole has become less innovative.

Instead, our review of empirical evidence has a much more limited aim: =
to determine whether or not those companies that have gotten large =
numbers of software patents have been induced to invest more in R&D, as =
the simple model implies they should.

Economists understand very well the costs of monopoly rights. Patent =
monopolies mean consumers pay higher prices either to a monopolist or in =
the form of licensing fees that are passed on. (Also, consumer choice =
may be limited.) These costs can be thought of as a social subsidy to =
patentholders. As your data make clear, a small number of large =
companies (mainly hardware companies) have been spending millions of =
dollars to build large portfolios of software patents. They hope to cash =
in on these government-sponsored subsidies that are potentially worth =
many many billions over the next 20 years.

Prudent policy makers should examine whether society receives =
commensurate benefit for these large subsidies. The static model =
provides the main justification for them: they supposedly encourage =
higher R&D spending. But we looked at the actual R&D spending (relative =
to sales) of those companies building large software patent portfolios. =
These companies did not increase their R&D to sales ratios.

This suggests that: a.) the simple static model does not accurately =
describe the effect of patents and b.) society may be getting a raw =
deal. Indeed, in a slightly more complex world than the static model, =
companies might obtain patents mainly to extract royalties from other =
firms (shocking, but true!).

3. Europe

Although some Europeans are opposed to software patents of any kind, =
much of what we hear is really a much more balanced view. Many people =
suggest that software should have patent protection in Europe, but =
perhaps with some limitations, e.g. a term shorter than 20 years, or =
limits on the prohibition against private use of patented ideas (like =
"fair use" in copyright). These suggestions provide a refreshing and =
balanced alternative to the "stronger is better" reflex one encounters =
in the U.S.

Most refreshing is that Europe is having a public discussion of this =
important policy issue at all, even if it does mean that some incorrect =
views get expressed. It is easy for us to forget that the current U.S. =
arrangement was largely the result of court decisions that were handed =
down with little discussion and no public review.

It is hard to predict the impact of the large number of software patents =
issued. Perhaps in the future, software startups will have to pay an =
"IBM tax" and a "Hitachi tax" and a "Xerox tax" etc. to avoid =
litigation. Perhaps also contingency-fee lawyers will become more active =
in this field, raising the level of uncertainty. These could be =
significant liabilities to the U.S. software industry. Many Europeans =
recognize that they may gain some competitive advantage with a more =
balanced policy.

Jim Bessen and Eric Maskin

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<DIV>&nbsp;</DIV>
<DIV style=3D"FONT: 10pt arial">----- Original Message -----=20
<DIV style=3D"BACKGROUND: #e4e4e4; font-color: black"><B>From:</B> <A=20
href=3D"mailto:jbessen@researchoninnovation.org"=20
title=3Djbessen@researchoninnovation.org>Jim Bessen</A> </DIV>
<DIV><B>To:</B> <A href=3D"mailto:srctran@world.std.com"=20
title=3Dsrctran@world.std.com>Gregory Aharonian</A> </DIV>
<DIV><B>Cc:</B> <A href=3D"mailto:maskin@ias.edu" =
title=3Dmaskin@ias.edu>Eric=20
Maskin</A> </DIV>
<DIV><B>Sent:</B> Saturday, February 03, 2001 7:28 AM</DIV>
<DIV><B>Subject:</B> reply on software patent paper</DIV></DIV>
<DIV><BR></DIV>
<DIV><FONT size=3D2>Greg,</FONT></DIV>
<DIV>&nbsp;</DIV>
<DIV><FONT size=3D2>Thanks for your comments on our Working Paper, =
"Sequential=20
Innovation, Patents and Imitation." (We are currently revising the =
January 2000=20
draft.) However, our intent appears to have been miscommunicated, so =
below are=20
some brief clarifying comments we hope you will publish:</FONT></DIV>
<DIV>&nbsp;</DIV>
<DIV><FONT size=3D2>1. Simplistic Models</FONT></DIV>
<DIV>&nbsp;</DIV>
<DIV><FONT size=3D2>We could not agree with you more that patent policy =
should not=20
be based on overly simple economic models. But please don't=20
blame&nbsp;<EM>us</EM> for this unfortunate development.</FONT></DIV>
<DIV>&nbsp;</DIV>
<DIV><FONT size=3D2>Fact is, for nearly 20 years U.S. patent policy has =
been=20
guided by an overly simple model that Todd Dickinson and most patent =
attorneys=20
recite with little provocation. It goes like this: "Without patents, =
competition=20
from imitators deprives innovators of profits on their innovations. =
Therefore,=20
they will not invest sufficient R&amp;D. Patents provide innovators with =

monopoly rents (licensing fees and extra profits from monopoly prices). =
These=20
rents encourage R&amp;D. Stronger patents mean more R&amp;D which means =
more=20
innovation. Stronger patents are always better." This simple argument =
appears to=20
be behind the subject matter extension of patents and the lowering of =
the=20
non-obviousness standards. It has also been used to argue for the =
extension of=20
the patent term.</FONT></DIV>
<DIV><FONT size=3D2></FONT>&nbsp;</DIV>
<DIV><FONT size=3D2>This common argument is what we call the "static =
model." We=20
show that with just a few slightly more realistic assumptions =
(sequential=20
innovation, alternative technologies), the conclusions of the model are =
turned=20
upside down. In a more dynamic world, stronger patents may actually =
reduce=20
innovation. Our point is not that patents are necessarily and always =
bad, but=20
that policy should be careful and balanced.</FONT></DIV>
<DIV>&nbsp;</DIV>
<DIV><FONT size=3D2>Indeed, prior to the 1980s, both economic theory and =
legal=20
theory took a balanced view, recognizing both benefits and costs to =
patents and=20
calling for limits on patent protection. Our paper argues for a return =
to this=20
perspective.</FONT></DIV>
<DIV>&nbsp;</DIV>
<DIV><FONT size=3D2>2. Empirical evidence on software</FONT></DIV>
<DIV>&nbsp;</DIV>
<DIV><FONT size=3D2>We do NOT argue that the explosion in software =
patents has=20
stifled innovation in software generally. We would hardly argue that the =

software industry as a whole has become less innovative.</FONT></DIV>
<DIV>&nbsp;</DIV>
<DIV><FONT size=3D2>Instead, our review of empirical evidence has a much =
more=20
limited aim: to determine whether or not those companies that have =
gotten large=20
numbers of software patents have been induced to invest more in R&amp;D, =
as the=20
simple model implies they should.</FONT></DIV>
<DIV>&nbsp;</DIV>
<DIV><FONT size=3D2>Economists understand very well the costs of =
monopoly rights.=20
Patent monopolies mean consumers pay higher prices either to a =
monopolist or in=20
the form of licensing fees that are passed on. (Also, consumer choice =
may be=20
limited.) These costs can be thought of as a social subsidy to =
patentholders. As=20
your data make clear, a small number of large companies (mainly hardware =

companies) have been spending millions of dollars to build large =
portfolios of=20
software patents. They hope to cash in on these government-sponsored =
subsidies=20
that are potentially worth many many billions over the next 20=20
years.</FONT></DIV>
<DIV>&nbsp;</DIV>
<DIV><FONT size=3D2>Prudent policy makers should examine whether society =
receives=20
commensurate benefit for these large subsidies. The static model =
provides the=20
main justification for them: they supposedly encourage higher R&amp;D =
spending.=20
But we looked at the actual R&amp;D spending (relative to sales) of =
those=20
companies building large software patent portfolios. These companies did =
not=20
increase their R&amp;D to sales ratios.</FONT></DIV>
<DIV>&nbsp;</DIV>
<DIV><FONT size=3D2>This suggests that: a.) the simple static model does =
not=20
accurately describe the effect of patents and b.) society may be getting =
a raw=20
deal. Indeed, in a slightly more complex world than the static model, =
companies=20
might obtain patents mainly to extract royalties from other firms =
(shocking, but=20
true!).</FONT></DIV>
<DIV>&nbsp;</DIV>
<DIV><FONT size=3D2>3. Europe</FONT></DIV>
<DIV>&nbsp;</DIV>
<DIV><FONT size=3D2>Although some Europeans are opposed to software =
patents of any=20
kind, much of what&nbsp;we hear is really a much more balanced view. =
Many people=20
suggest that software should have patent protection in Europe, but =
perhaps with=20
some limitations, e.g. a term shorter than 20 years, or limits on the=20
prohibition against private use of patented ideas (like "fair use" in=20
copyright). These suggestions provide a refreshing and balanced =
alternative to=20
the "stronger is better" reflex one encounters in the U.S.</FONT></DIV>
<DIV>&nbsp;</DIV>
<DIV><FONT size=3D2>Most refreshing is that Europe is having a public =
discussion=20
of this important policy issue at all, even if it does mean that some =
incorrect=20
views get expressed. It is easy for us to forget that the current U.S.=20
arrangement was largely the result of court decisions that were handed =
down with=20
little discussion and no public review.</FONT></DIV>
<DIV>&nbsp;</DIV>
<DIV><FONT size=3D2>It is hard to predict the impact of the large number =
of=20
software patents issued. Perhaps in the future, software startups will =
have to=20
pay an "IBM tax" and a "Hitachi tax" and a "Xerox tax" etc. to avoid =
litigation.=20
Perhaps also contingency-fee lawyers will become more active in this =
field,=20
raising the level of uncertainty. These could be significant liabilities =
to the=20
U.S. software industry. Many Europeans recognize that they may gain some =

competitive advantage with a more balanced policy.</FONT></DIV>
<DIV>&nbsp;</DIV>
<DIV><FONT size=3D2>Jim Bessen and Eric =
Maskin</FONT></DIV></BODY></HTML>

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