[Patents] market failures in non-patent software property

[phm@a2e.de (PILCH Hartmut)]

On Thu, 9 Aug 2001, gaikin wrote:

> Software patents: that's from the Inc. magazine article. Think again,
> people.

> "Third, Clemons and Hitt cite a case involving a consulting contract in the
> financial services industry. A credit-card company hires a systems developer
> to build a complex database to correlate private product-use data with
> publicly available customer data. The objective is to identify the
> predictors of profitable customers so that new products can be developed for
> such clients. The systems consultant builds the database and then - having
> acquired expertise in developing data warehousing systems for the credit
> card industry - it proceeds to underbid competitors for work at other credit
> card companies. It not only re-uses expertise but also the actual code from
> its previous engagement. "More damaging to the original client, the
> consulting firm can now pitch this work to competing credit card companies,
> and with the expertise acquired during its first implementation, it can
> enable these firms to successfully implement 'copycat' technologies years
> before they otherwise would have been able to do," Clemons and Hitt note.
> The rapid deployment of the same technology by rivals dramatically shortens
> the period of competitive advantage that the original client enjoys."

At last an economic argument with reference to a realistic situation!
Thanks.

However this is still a case where the market mechanisms can be trusted.

Several scenarios might evolve:

1 the credit card "technology" is considered fairly trivial and not in
  need of a longtime competitive advantage.  Thus the subcontractor will
  work at attractive conditions for many clients in short sequence.
2 the "technology" is considered highly competition sensitive.  In that
  case the development will be carried out in-house or the subcontractor
  will be closely associated with the monopoly benefits.

Even if things didn't work out so well and the financial services company
was deterred from its investment by a "lack of protection", the following
questions would have to be asked:

1 Would such a deterring effect really constitute a market failure and a
  macro-economic loss?  Or would the progress of computing just take a
  different (and perhaps more efficient) path?
2 In case we affirm that there is a market failure, would patents really
  constitute a remedy?  Are complex database structures really adequately
  characterised by categories such as "novel" and "inventive" ?
  Wouldn't it be better for the financial service company to
  oblige its subcontractor by an explicit contract or perhaps
  to argue the case for special applications of copyright and
  competition law, perhaps in the context of the anti-cloning / sui
  generis debate ?  Wouldn't it be very short-sighted of us as legislators
  to solve some imperfections in these laws by jumping on the bandwagon
  of an old IP system which was never created for addressing these
  problems?

--
Hartmut Pilch                                           http://phm.ffii.org/
Protecting Innovation against Patent Inflation        http://swpat.ffii.org/
80000 signatures against software patents         http://www.noepatents.org/