Intellectual Property Rights and Firms Outline How can firms benefit from IPRs? Exploring the returns to IPRs Markets for IPRs Costs of obtaining and enforcing IPRs Strategies for IPRs Empirical studies on the value of IPRs

How can firms benefit from IPRs? Lowering costs via process innovation: can increase profit at current price can increase market share if lower price With product innovation firm expects to increase sales/gain market share as novelty of the product attracts customers Also has option to license process or product to other firms and collect fees Broader technology exchange agreements can be made – termed patent pools Signalling value to investors using IPRs

Are IPRs critical to innovation? Unregistered intellectual property rights also play a role in sustaining profits Trade secrets Confidential information Examples – technological know-how, formulas, recipes, customer information Advantages of secrecy over patents – do not have to reveal information to wider world

Effectiveness of different methods of appropriability

Other alternatives to IPRs Open innovation model – individual firms cannot sustain complex innovation projects Engage in sharing of knowledge, ideas and inventions Can include university departments as well as other firms Open source and public licence in field of computer software Access to source code and permission to modify it provided extend same rights to others when releasing their products

Skewness in returns A few patents have very high values but many patents have little or no value In aggregate total value can be high but value is very unevenly distributed Similar differentials are seen for trademarks – compare top twenty brands (Coca Cola, Disney, Google) with any new shampoo or toothpaste now being launched Also for copyright – compare successful Hollywood movie with value of this book

Markets for IPRs Licensing decision influenced by: novelty, codified/tacit knowledge, breadth, small firm size, not core tech., degree of competition Compulsory licensing requested: for national emergency, to restore competition, Patent trolls - market liquidity or market impediment?

Costs of obtaining and enforcing IPRs Direct costs of obtaining IPRs vary Generally not too high for each country Costs mount if seeking coverage worldwide Wide coverage needed for traded goods and services Enforcement can be very costly Lawyers fees mount with length of case Small firms can be disadvantaged Settlement out of court is a useful option

Strategies for benefiting from patents I StrategyDescription Obtain market, or monopoly, power Standard economic argument to increase profits. Lipitor, which is Pfizer’s patented cholesterol-lowering drug, is estimated to have sales of $12 billion in To act as a signal A patent may signal to financiers, granting agencies, customers, suppliers, universities or others that the firm is innovative. Hsu and Ziedonis (2007) find some evidence for this in 370 US start-up semi-conductor firms. To restrain power of suppliersFor example, Nokia has patents relating to loudspeakers and other components, even though these are manufactured by suppliers.

Strategies for benefiting from patents II Strategy To build negotiating power Description This relates to the idea of patent pools. Firms may need their own patents to enter cross- licensing. To avoid being invented aroundThis is the idea of patent thickets. Having a number of patents covering similar areas makes it more difficult to invent around. To prevent others from patenting (‘blocking’), or developing certain technologies (‘fencing’), or raise costs of entrants or rivals (‘flooding’ or ‘blanketing’) These strategies are self- explanatory. They result in patent thickets and/or act to change rival’s costs or strategies.

Strategies for benefiting from trademarks StrategyDescription / examples Signal origin and quality of productSuch a signal allows marketing and advertising to build this into a brand (e.g. Coca-Cola or Intel Inside) Families of trademarksMcCafe, McChicken and McFeast - common element to link products. Multiple trademarksIntel Inside strategy includes words, logos, musical jingle. Intel currently has over 9,000 trademarks. Umbrella or corporate trademarkingIncluding a single name in many trademarks (e.g. Virgin Megastore, Virgin Atlantic, Virgin Brides. Strategic oppositionTrademark owners monitor and object to new trademarks, so as to prevent potential competition

Empirical studies on the value of patents What metrics for IPR value? Stock market value - reflects investors perceptions of value of IPR now and in future Studies show patents (weighted by citations) are associated with increased market value Firm productivity - reflects ability to generate high value output from inputs at current time Studies again show a positive association between productivity and patents

Analysis of patent renewals Demonstration of inequality in patent value using renewals data After initial period of grant patents have to be renewed with a fee being paid Firms will not pay to renew patents that have no value Renewal fees filter out less valuable patents leaving those where value > or = fees Evidence for Europe has been used to calculate lower bound estimates of total value of patents

Returns to trademarks, copyright Parallel methods have been applied to trademark evaluation as to patents Stock market value, productivity and firm profits are positively associated with trademark acquisition Copyright is much harder to evaluate No requirement to register and no option to do so outside of US, so no databases Get indirect assessment from rising value of firms when copyright extended from 50 to 70 years after death of author

Questions for discussion 1.Why are the returns to IPRs so skewed? 2.Does the existence of patent trolls imply the patent system is working well? 3.When, if ever, should compulsory licenses be used? 4.How can one empirically assess the value of IPRs to firms? 5.Are small or large firms more likely to use patent system? Does the patent system help or hinder new firms? 6.Find some examples of (a) patenting strategies and (b) trademarking strategies.

References Gambardella, A., P. Giuri and A. Luzzi (2007), 'The market for patents in Europe', Research Policy, 36, Heller, M. A. and R. Eisenberg (1998), 'Can patents deter innovation? The anticommons in biomedical research', Science 280, Hall, B. (2000), ‘Innovation and market value’, in R. Barrell, G. Mason and M. O'Mahoney (eds.), Productivity, Innovation and Economic Performance, Cambridge UK, Cambridge University Press. Bloom, N. and J. van Reenen (2002), ‘Patents, real options and firm performance’, Economic Journal, 112, C Schankerman, M. and A. Pakes (1986), ‘Estimates of the value of patent rights in European countries during the post-1950 period’, Economic Journal, 96(384),