Econ 522 Economics of LawMonday…Our experiment…Slide 4Slide 5ConclusionDiscussion questionSlide 7Intellectual PropertyInformation: costly to generate, easy to imitateInformation: costly to generate, easy to imitatePatents: one way to solve the problemComparing the two outcomesPatents solve one inefficiency by introducing anotherPatents: a bit of historyPatent breadthSlide 17Patent lengthDo the details matter?Slide 20Slide 21Alternatives to patents for encouraging innovationSlide 22CopyrightSlide 25Slide 26Slide 27Slide 27TrademarksTrademarks – exampleTrademark dilutionSlide 31Trade SecretsSlide 33Econ 522Economics of LawDan QuintFall 2011Lecture 72Established properties of an efficient property law systemPrivate goods are privately owned, public goods are notOwners have maximum liberty over how they use their propertyInjunctive relief used when transaction costs are low,damages used when transaction costs highWe tried “testing Coase” through an experimentCan UW undergrads reallocate poker chips efficiently?(Cost me $124)Monday…3Take 1: Full Information (values on nametags)Our experiment…26/28 = 93%586032purple chip2purple chip4purple chip4(sorry)6purple chip6purple chippurple chip8purple chippurple chipred chip8purple chippurple chip10purple chippurple chip10red chipred chip12fraction of potential gains realizedactual final allocationefficientallocationstartingallocation4Take 2: Private Information (values hidden)Our experiment…18/24 = 75%424824purple chip2purple chip3purple chip34purple chippurple chip4red chippurple chip6purple chipred chip6purple chippurple chip8purple chippurple chip8purple chipred chip10fraction of potential gains realizedactual final allocationefficientallocationstartingallocation5Take 3: Uncertainty Take 4: Adverse SelectionOur experiment…100%12128chip2 X die roll(actually 8)chipchip3 X die roll(actually 12)fraction of potential gains realizedactual finalallocationefficientallocationstartingallocation0%121812chip2 X die roll(actually 12)chipchip3 X die roll(actually 18)fraction of potential gains realizedactual finalallocationefficientallocationstartingallocation6Coase works pretty well, except under asymmetric infoFull info: 93% of gains achievedPrivate info: 75%Uncertainty: 100%Asymmetric info: 0%Comparing “uncertainty” to “asymmetric info”…Seller’s value was 2 X die roll, buyer’s value was 3 X die rollIf nobody knows die roll, no problem – they can trade based on the expected valueBut if seller knows die roll, problemIn strategic settings, information can have negative value – the seller could be worse off for having information!Conclusion7(old exam question, question by Alex Tabarrok at Marginal Revolution blog)In Virginia, the common law has long held that if a neighbor’s tree encroaches on your yard you may cut the branches as they cross the property line, but any damage the tree does to your property is your problem. Your neighbor can even sue if your pruning kills the tree.In 2007, the Virginia Supreme Court overruled this 70-year-old precedent, making it your neighbor’s duty to prune or cut down the tree if it is a “nuisance.”Which is better: the new rule or the old? What would the Coase Theorem say about the two rules?Discussion question8Applications ofProperty Law9Intellectual 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 Property10Example: 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 $450 eachInformation: costly to generate, easy to imitateup-front investment: 1,000monopoly profits: 2,500duopoly profits: 450 each11Solve 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(-550, 450) (1500, 0)(0, 0)up-front investment: 1,000monopoly profits: 2,500duopoly profits: 450 each12Patent: 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(-550, 450) (1500, 0)(0, 0)up-front investment: 1,000monopoly profits: 2,500duopoly profits: 450 each450 – P13Comparing the two outcomesFIRM 1 (innovator)Innovate Don’tFIRM 2 (imitator)Imitate Don’t(-550, 450) (1500, 0)(0, 0)up-front investment: 1,000monopoly profits: 2,500duopoly profits: 450 eachFIRM 1 (innovator)Innovate Don’tFIRM 2 (imitator)Imitate Don’t(-550, 450 – P) (1500, 0)(0, 0)Without patents:Drug never discoveredWith patents:Drug gets discoveredBut…14Without 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…Patents solve one inefficiencyby introducing anotherCS1,250Profit2,500P = 50P = 100 – QQ = 50DWL1,250CS4,050Profit 450 x 2P = 10Q = 90DWL50Monopoly Duopolyup-front investment: 1,000monopoly profits: 2,500duopoly profits: 450 eachNet Surplus = 2,750 Net Surplus = 3,95015First 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 history16Narrow patents might allow us each to patent own inventionBroad patents might not“Winner-take-all” race to be firstPatent breadth17Does a patent on the “pioneering invention” cover the application as well?Can you patent an improvement to an existing product?Patent breadth18Patent lengthNeed to last long enough for firms
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