Econ 522 Economics of LawLogisticsLast lecture: what would an efficient property law system look like?Next three lectures: applicationsSlide 4Dynamic gamesSlide 7We can put payoffs from this game into a payoff matrix…Slide 9The key assumption behind subgame perfect equilibrium: common knowledge of rationalitySlide 10Intellectual PropertyInformation: costly to generate, easy to imitateInformation: costly to generate, easy to imitatePatents: one way to solve the problemBUT… patents solve one inefficiency by introducing anotherPatents: a bit of historyTwo variables in patent law: how broad patents are, and how long they lastSlide 19Slide 20Slide 21Slide 22Slide 23Slide 23CopyrightSlide 26Slide 27Slide 28Slide 28TrademarksSlide 31Slide 32Slide 32Trade SecretsSlide 34Thursday…Econ 522Economics of LawDan QuintFall 2009Lecture 62HW1: due Tues Oct 6, at the start of classOfficially: due at 11 a.m. sharpOnce I start my lecture, it’s late, will lose points(Sorry, but I mean it)SchedulingUsual OH (Wed 1:30-3:30) this weekNo office hours next Wednesday (Sept 30)No lecture next Thurs (Oct 1)Will hold extra OH Monday afternoon Oct 5, time TBAAnd Monday afternoon Oct 12, time TBALogistics31. What things can be privately owned?Private goods should be privately ownedPublic goods should be publicly provided/regulated2. What can owners do with their property?Maximum liberty – owners can do anything that doesn’t impinge on others’ rights/property3. How are property rights established?4. What remedy is given when rights are violated?Low transaction costs injunctive reliefHigh transaction costs damagesLast lecture: what would an efficient property law system look like?4How is the law actually designed?Can we find an economic rationale for the way the law is designed?Today:A bit more game theory: sequential rationalityFirst application of property law: intellectual propertyNext three lectures: applications5Dynamic Games and Sequential Rationality6Game theory we’ve seen so far: static games“everything happens at once”(nobody observes another player’s move before deciding how to act)Dynamic gamesone player moves firstsecond player learns what first player did, and then movesDynamic games7Dynamic gamesFIRM 1 (entrant)Enter Don’t EnterFIRM 2(incumbent)Accommodate Fight(10, 10) (-10, -10)(0, 30)A strategy is one player’s plan for what to do at each decision point he/she acts atIn this case: player 1’s possible strategies are “enter” and “don’t”, player 2’s are “accommodate” and “fight”88We can look for equilibria like beforewe find two: (Enter, Accommodate), and (Don’t Enter, Fight)question: are both equilibria plausible?sequential rationalityWe can put payoffs from this game into a payoff matrix…10, 10 -10, -100, 30 0, 30Accommodate FightEnterDon’t EnterFirm 2’s ActionFirm 1’s Action9Dynamic gamesFIRM 1 (entrant)Enter Don’t EnterFIRM 2(incumbent)Accommodate Fight(10, 10) (-10, -10)(0, 30)In dynamic games, we look for Subgame Perfect Equilibriaplayers play best-responses in the game as a whole, but also in every branch of the game treeWe find Subgame Perfect Equilibria by backward inductionstart at the bottom of the game tree and work our way up10Firm 1 knows firm 2 is rationalSo he knows that if he enters, firm 2 will do the rational thing – accommodateSo we enters, counting on firm 2 to accommodateThis is the idea of sequential rationality – the assumption that, whatever I do, I can count on the players moving after me to behave rationally in their own best interestThe key assumption behind subgame perfect equilibrium: common knowledge of rationality11Back to…Property Law12Intellectual property: broad term for ways that an individual, or a firm, can claim ownership of informationPatents – cover products, commercial processesCopyrights – written ideas (books, music, computer programs)Trademarks – brand names, logosTrade SecretsIntellectual Property13Example: new drugRequires investment of $1,000 to discoverMonopoly profits would be $2,500Once drug has been discovered, another firm could also begin to sell itDuopoly profits would be $250 eachInformation: costly to generate, easy to imitateup-front investment: 1,000monopoly profits: 2,500duopoly profits: 250 each14Solve the game by backward induction:Subgame perfect equilibrium: firm 2 plays Imitate, firm 1 playsDon’t Innovate, drug is never discovered(Both firms earn 0 profits, consumers don’t get the drug)Information: costly to generate,easy to imitateFIRM 1 (innovator)Innovate Don’tFIRM 2 (imitator)Imitate Don’t(-750, 250) (1500, 0)(0, 0)up-front investment: 1,000monopoly profits: 2,500duopoly profits: 250 each15Patent: legal monopolyOther firms prohibited from imitating Firm 1’s discoverySubgame perfect equilibrium: firm 2 does not imitate; firm 1 innovates, drug gets developedPatents: one way to solvethe problemFIRM 1 (innovator)Innovate Don’tFIRM 2 (imitator)Imitate Don’t(-750, 250 – P) (1500, 0)(0, 0)up-front investment: 1,000monopoly profits: 2,500duopoly profits: 250 each16Without patents, inefficient outcome: drug not developedWith patents, different inefficiency: monopoly!Once the drug has been found, the original incentive problem is solved, but the new inefficiency remains…BUT… patents solve one inefficiency by introducing anotherCSProfitP* = 50P = 100 – QQ* = 50DWL17First U.S. patent law passed in 1790Patents currently last 20 years from date of applicationFor a patent application to be approved, invention must be:novel (new)non-obvioushave practical utility (basically, be commercializable)Patentholder whose patent has been infringed can sue for both damages and an injunction against future violationsPatents are property – can be sold or licensed to othersPatents: a bit of history18Patent breadthTwo variables in patent law: how broad patents are, and how long they last19Patent breadthTwo variables in patent law: how broad patents are, and how long they last20Patent breadthTwo variables in patent law: how broad patents are, and how long they last21Patent breadthTwo variables in patent law: how broad patents are, and how long they last22Patent breadthPatent lengthtradeoff: how long to maintain ex-post inefficiency
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