Economics of Intellectual Property Rights

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IntroductionWorld Intellectual Property Organization (WIPO) [1] defines “Intellectual property (IP)” as creations of

the mind: inventions, literary and artistic works, and symbols, names, images, and designs used in

commerce.

IP is divided into two categories: Industrial property, which includes inventions (patents), trademarks,

industrial designs, and geographic indications of source; and Copyright, which includes literary and

artistic works such as novels, poems and plays, films, musical works, artistic works such as drawings,

paintings, photographs and sculptures, and architectural designs. Rights related to copyright include

those of performing artists in their performances, producers of phonograms in their recordings, and those

of broadcasters in their radio and television programs. The innovations and creative expressions of

indigenous and local communities are also IP, yet because they are “traditional” they may not be fully

protected by existing IP systems. Access to, and equitable benefit-sharing in, genetic resources also raise

IP questions.

Following are the broad categories under Intellectual Property:

Patent : A patent is an exclusive right granted for an invention, which is a product or a process that

provides a new way of doing something, or offers a new technical solution to a problem. A patent

provides protection for the invention to the owner of the patent for a limited period, generally 20 years.

Trademark : A trademark or brand-name is a distinctive sign which identifies certain goods or services as

those produced or provided by a specific person or enterprise. The period of protection for a trademarkvaries, but can generally be renewed indefinitely.

Industrial Design : An industrial design - or simply a design - is the ornamental or aesthetic aspect of an

article produced by industry or handicraft; registration and renewals provide protection for, in most cases,

up to 15 years.

Copyright and Related Rights : Copyright is a legal term describing rights given to creators for their

literary and artistic works (including computer software). Related rights are granted to performing artists,

producers of sound recordings and broadcasting organizations in their radio and television programmes.

Geographical Indication : A geographical indication is a sign used on goods that have a specific

geographical origin and often possess qualities or a reputation that are due to that place of origin.

Trade Secrets/Undisclosed Information is protected information which is not generally known among, or

readily accessible to, persons that normally deal with the kind of information in question, has commercial



value because it is secret, and has been subject to reasonable steps to keep it secret by the person lawfully

in control of the information.

Intellectual property rights and monopolyGoods can be classified as rivalrous and non-rivalrous goods. Non-rivalrous goods can be used by

multiple people at the same time (e.g. mathematical theorems, scientific formulae). The marginal cost

(MC) of non-rivalrous goods is zero after the discovery of the good. Goods such as texts, creative

material, software, inventions once created can be used by multiple people with least cost leading to a

perfectly competitive market making price equal to MC i.e. zero.

However by granting exclusive rights of use to an individual or group governments try to encourage

people to come up with new inventions and contribute to knowledge base of the society. Legal procedures

can be used to prevent multiple usage of non-rivalrous goods. IP is an example of such legal provision.Since now the market is restricted to a single producer the market is essentially a monopolist market.

What are the monopoly costs of strong property rights for Intellectual Property Right (IPR)? A

monopolistic firm sells its produce at a monopolistic price, and earns monopolistic profits. For a

monopoly resulting from the holding of an IPR, this results in suboptimal incentives to commit resources

to investment, since monopoly profits are less than the overall benefit to society (Monopolist economies

lead to dead weight loss). In other words, a rational monopolist will only invest in an amount of research

that will earn it the monopoly profit, and such behavior will not achieve the maximal benefit to society

that would obtain if production were undertaken in a competitive market. Consumers lose because

monopolists restrict output to boost price, and therefore lose out by not enough of the monopoly good

being sold. Competition policy seeks to encourage competition by limiting how firms in oligopolistic

industries exercise their market power. Intellectual property rights, such as patents, confer monopoly

power on the owner of the patent with a view to encouraging innovation by shielding the owner from

competition [3] (see Carlton and Gertner, 2002). Therefore, there is an inherent and fundamental tension

between IPR and competition policy.

Approaches to Valuing IPR

Costs ApproachThis method simply counts the number of patents granted or applied for by a particular economic unit,

such as a private firm or department. More patents (adjusted influences such as firm size or geographical

location), represent a higher volume of innovative output and taken as an indicator both of the value of



rights were awarded on a strictly “novel” basis, so that it would become very difficult to get a patent when

a substantial body of “prior art” exists.

Company Market ValueThe share price of a quoted company represents the markets‟ best valuation of the expected future

dividend or share repurchase payments likely to be made by the company. Financial markets are assumed

to price shares “correctly”. Investors‟ estimates of the future dividend payments will be a function of the

stock of tangible and intangible assets owned by the company. IPR are one component of a firm‟s

intangible assets and hence contribution to the value of the company. The advantage of this method is that

it is forward looking – it predicts the future value of the firm as compared to the costs or productivity

methods which rely on expenses done in past. Patents also affect market value much more quickly than

they affect productivity measures, a result that is likely due to the time it takes to embody new

innovations in work processes and to adjust physical capital to the new innovation. Certain IPR activities

like trademarks might be negatively correlated to the market value since people outside the firm assume

trademarks are achieved through high expense activities like advertising and marketing.

Costs of enforcing IPRDetecting IPR infringement is not an easy task. Most infringed goods are also sold under secrecy or in

grey markets (pirated goods). Even the genuine manufacturers of such products often do not have specific

enforcement departments within their organizations, meaning that efforts to curtail infringement are often

dispersed across finance, marketing and legal divisions with no easily measurable or identifiable budget

attributable directly to enforcement. There is no direct way to record the amount of money lost due to IPR

infringement since such sales might also happen under reduced prices and a sale might never have

occurred at the original prices that companies charge. The holders of the IPR suffer because of losses in

sales and a loss in goodwill if consumers wrongly associate a counterfeit product of inferior quality to the

manufacturers of the genuine brand. Similarly, countries where the counterfeit product is sold are likely to

suffer reduced tax revenue, job losses, diminished investment in innovation, and the public administration

costs associated with detection, enforcement and litigation.

Adverse SelectionConsumers of counterfeit products are likely to pay high price for products of inferior quality. Non-

deceptive counterfeits are bought in the full knowledge on the part of the purchaser that they are buying a

counterfeit product, whereas a deceptive counterfeit is the converse of this concept. Nevertheless,

although counterfeiting allows non-deceived consumers to enjoy the use of a branded good at a low price,

they do impose a negative externality on purchasers of the genuine product because the status attached to



the genuine product is reduced by the existence of counterfeits. In extreme cases adverse selection forces

the high quality goods out of the market and only the low quality goods remain.

Litigation costsPreliminary injunctive grants prevent alleged infringers from using the infringed patent during the period

of the trial. Small firms, who are weaker financially than larger firms, would be unable to compensate the

patentee for damage occurring during a trial if found guilty, or might not be able to sustain even an

injunction. The possibility of increasing legal costs and the possibility of going out of business may lead

defendants to settle on unfavourable terms; this issue is relevant to financially constrained smaller firms

since such firms would probably be worse off when faced with a preliminary injunction. Firms with high

litigation costs face a lower likelihood of patenting in areas where there are firms who have a lower cost

of litigation. Again, it is possible that new firms do not make this decision purely on the basis of legal

costs, but instead are driven to patent in areas where there are few older, established competitors.



Process of filing a patent with US Patent Office (USPTO)



References1. http://www.wipo.int/about-ip/en/ 2. „The Economics of Intellectual Property: A Review to Identify Themes for Future Research ‟,

Dixon & Greenhalgh (2002) http://www.economics.ox.ac.uk/Research/wp/pdf/paper135.pdf 3. „Intellectual property, antitrust, and strategic behaviour‟, National Bureau of Economic Research,

Working Paper No. w8796, Carlton, D. and R. Gertner (2002)http://www.nber.org/papers/w8976.pdf?new_window=1

4. „Estimates of the value of patent rights in European countries during the post -1950 period‟Schankerman, M. and A. Pakes (1986)

5. „The effects of strengthening patent rights on firms engaged in cumulative innovation: insightsfrom the semiconductor industry‟ , Hall, B. and R. Ziedonis (2001)

http://www.wipo.int/about-ip/en/


http://www.economics.ox.ac.uk/Research/wp/pdf/paper135.pdf



http://www.nber.org/papers/w8976.pdf?new_window=1





Economics of Intellectual Property Rights

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