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UW-Madison ECON 522 - Lecture 7 Notes

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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 72Established properties of an efficient property law systemPrivate goods are privately owned, public goods are notOwners have maximum liberty over how they use their propertyInjunctive relief used when transaction costs are low,damages used when transaction costs highWe tried “testing Coase” through an experimentCan UW undergrads reallocate poker chips efficiently?(Cost me $124)Monday…3Take 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 allocationefficientallocationstartingallocation4Take 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 allocationefficientallocationstartingallocation5Take 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 finalallocationefficientallocationstartingallocation6Coase works pretty well, except under asymmetric infoFull info: 93% of gains achievedPrivate 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 rollIf nobody knows die roll, no problem – they can trade based on the expected valueBut if seller knows die roll, problemIn 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 Law9Intellectual property: broad term for ways that an individual, or a firm, can claim ownership of informationPatents – cover products, commercial processesCopyrights – written ideas (books, music, computer programs)Trademarks – brand names, logosTrade SecretsIntellectual Property10Example: new drugRequires investment of $1,000 to discoverMonopoly profits would be $2,500Once drug has been discovered, another firm could also begin to sell itDuopoly profits would be $450 eachInformation: costly to generate, easy to imitateup-front investment: 1,000monopoly profits: 2,500duopoly profits: 450 each11Solve 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 each12Patent: legal monopolyOther firms prohibited from imitating Firm 1’s discoverySubgame 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 discoveredWith patents:Drug gets discoveredBut…14Without patents, inefficient outcome: drug not developedWith 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 = 3,95015First U.S. patent law passed in 1790Patents currently last 20 years from date of applicationFor a patent application to be approved, invention must be:novel (new)non-obvioushave practical utility (basically, be commercializable)Patentholder whose patent has been infringed can sue for both damages and an injunction against future violationsPatents are property – can be sold or licensed to othersPatents: a bit of history16Narrow patents might allow us each to patent own inventionBroad patents might not“Winner-take-all” race to be firstPatent breadth17Does a patent on the “pioneering invention” cover the application as well?Can you patent an improvement to an existing product?Patent breadth18Patent lengthNeed to last long enough for firms


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UW-Madison ECON 522 - Lecture 7 Notes

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