State of Innovation

Patents and Innovation Economics

Patent and Antitrust Law

Historically there has been a conflict between antitrust law and patent law.  Periods of aggressive antitrust enforcement have coincided with the courts’ disfavor of patents.  Is there any economic justification for using antitrust law to limit the strength of patents?

The goal of antitrust law is to ensure competition in the production and sale of goods.  The reason why we want to have competition is to reduce the cost of goods to consumers.  If there is just one company selling a good, then they can charge almost any price they want.  If there are just a few companies selling a good, then they will not compete for customers as vigorously on price to attract consumers as when there are many companies selling a good.  The ideal for antitrust is to have “perfect competition” for all goods.  Perfect competition is the situation where no buyer or seller can effect the price of a good.  A company’s return on a product in a perfectly competitive market will approach zero.

The goal of patent law is to promote invention.  Patent laws were created as part of a country’s industrial policy.  Countries used patents to gain access to inventions in other countries and to encourage the development of inventions.  Modern patent law is only used to promote the development of inventions.  The ideal of patent law is to have everyone developing new technologies that lead to new products and services.

What incentives do these laws provide in the marketplace?  Lets look at how these laws would operate in the case of Ford’s Model T car.  Under an aggressive antitrust policy the goal would be to create competition for the Model T.  The ultimate result of antitrust law would be to have so many competitors that the Model T is free.  However, this would kill any incentive to innovate since any innovation would be hit with an antitrust policy to force competition on the innovator until there was no profit in making the innovation.  So while we would have relatively cheap cars, we would be stuck with a Model T.  Patent law on the other hand would prevent competitors, for a limited period of time, from copying any of the innovations associated with the Model T.  As a result, the potential competitors of the Model T would be forced to innovate.  When they saw that Ford was making strong profits because of his innovations, they would be motivated to invent.  This would lead to a virtuous cycle of inventors creating enclosed cars, cars with starters, cars with four wheel drive, airplanes, jets, etc.  The long term advantage is in encouraging invention instead of encouraging competition.  Antitrust encourages commoditization which not only discourages innovation it discourages production.  Whenever there is a conflict between patent law and antitrust, patent law must rule.

February 3, 2010 - Posted by | -Economics, Innovation | , , , ,

1 Comment »

  1. Great explanation!

    Comment by Kevin Halling | February 5, 2010 | Reply


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