The Tragedy of Under-Innovation : Intellectual Property Rights and the Anticommons A Review of the Literature Annabelle Berklund Colorado State University February 25 th, 2015 AUTM 2015 Annual Meeting

Research Question and Motivations Can intellectual property rights stifle, rather than encourage innovation? Examples:  Tesla released patents  Myriad Case

How Do Economists View Patents and Innovation?  Patents allow research entities to appropriate some of the value of their discoveries  increased incentives to conduct R&D  Patents allow firms to act as a gatekeeper and encourage follow-on innovations, including tacit know-how  Patents create a tradeoff between incentives and efficiency  U.S. Patent examiners have perverse incentives  increased patenting in U.S.

What is the Tragedy of the Anticommons? A situation in which multiple owners each have exclusion rights over a scarce resource and no one has an effective privilege of use (Heller, 1998) Property rights over a single component of a complex technology lead to over fragmentation of rights and increase transaction costs Results in underinvestment, underdevelopment and underuse

Anticommons and Intellectual Property Several patent holders have exclusionary rights over their invention Follow-on inventions must negotiate licenses to use previous invention If negotiations fail fewer inventions make it to the market  under- innovation This problem increases as the complementary and sequential nature of inventions increases

Heuristic Examples of Intellectual Anticommons Biomedical Research (Heller and Eisenberg, 1998)  Gene fragment patents  Oncomouse and Cre-Lox  Reach Through License Agreements Agricultural Biotechnology (Graff, et. al 2003)  Plant genetic engineering and market consolidation Energy Innovations (Cahoy and Glenna, 2009) + ME!  Advanced ethanol-based biofuels

Why does this matter? Inefficient licensing markets  difficulty in out-licensing and lower survival and success rates for startup companies

Theoretical Economic Models of the Anticommons  Largely addresses bargaining and transaction costs for patent rights post invention discovery by private firms who are assumed to appropriate all patent royalties (Buchanan & Yoon, 2000; Bessen & Maskin; 2009, Comino, Manenti, Nicolo (2011), D’Agata (2012)).  Asymmetric information between upstream and downstream innovators (Bessen (2004), Bessen and Maskin (2009).  Divergent expectations about payoffs from patents  inefficient license bargaining (Galasso, 2012, Priest and Kliein 1984).

Empirical Tests of the Anticommons …are largely inconclusive  How do you test the counter factual? Empirical techniques include:  Changes in follow-on citation rates  Human Genetics (Murray and Stern, 2007; Murray and Huang, 2009)  5-10% decrease in citation rates following patent grant  Patent Invalidations (Galasso and Schankerman, 2013)  Patent invalidation leads to an average increase of 50% in subsequent citations  Fragmentation Index  Semiconductor Industry (Ziedonis, 2004)  Capital intensive firms patent 5+ times more aggressively when markets for technological inputs are highly fragmented

Proposed Solutions “avoiding tragedy requires overcoming transaction costs, strategic behaviors, and cognitive biases of participants” (Heller and Eisenburg, 2001).  Legal  Limit patent breadth; improve patent quality  Private Ordering or Collective Action Mechanisms  Patent pools, brokers & cross-licensing  Collaborations and partnerships  Clearing houses All of these require some monetary or effort costs, which reduce, but do not eliminate, transaction cost

The Role of University Research and TTOs Can public university’s missions and practices help prevent or supersede the incursion of the anticommons? Could the use of public domain mechanisms help remove transaction costs? Are universities better suited to form collective action mechanisms than industry? Does the private return from patenting justify the opportunity cost of sharing knowledge in the public domain and allowing spillovers?

Questions or Comments?

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