Economics of patent policy in the digital economy

Abstract

Advances in information technology (IT) have enabled the design and development of innovations in software and computer-assisted business methods. Firms attempt to leverage these innovations to gain competitive advantages through cost reduction, or quality improvements, and often pass some benefits to consumers. However such competitive advantages are increasingly difficult to sustain because IT-enabled innovations are becoming easier to copy or imitate. Competitors can use reverse engineering or decryption techniques to discover how an innovation operates, modify the original and distribute the amended innovation as a new product. Unfortunately, the ability of competing firms to imitate quickly and cheaply may reduce the incentives for firms to incur the cost to innovate. Much literature discusses ways government may induce firms to innovate and thus increase current and future social welfare. One tool available to government to provide such incentives is patent protection, i.e. providing an exclusive right of the innovations to the innovator. One goal of patent policy is to maximize social welfare by providing incentives to innovate while simultaneously maintaining a competitive market. Policymakers disagree over how to balance these two often-conflicting goals. Much of the disagreement is based on what factors the government may control to provide protection for innovating firms and the socially optimal level of patent protection. Determining optimal protection policy is a non-trivial task. The complexity arises from stakeholders who may have contradictory objectives and a menu or mix of options. Of course it is difficult to reach the first-best solution because the social planner does not have full access to information about firms and consumers. This dissertation reviews economic theories of patent protection, address problems and issues related to the progress of ITs, and investigate how a specific set of patent policy affect the incentives for firm to develop technological innovations and the way developed innovations are adopted and diffused throughout the marketplace. This work builds on, and contributes to, literatures in the areas of information systems, economics, public policy and law and provides valuable insights for regulators responsible for designing and evaluating patent systems and for firms competing strategically under these systems.