1. Professor Jonathan Masur The Law & Economics of Information 1

2. Class 3 – July 20, 2016 IP Across Technological and Artistic Markets 2

3. Heterogeneous Markets Yesterday we discussed the transaction cost economics underlying intellectual property – Important for questions about IP scope, IP timing, and IP terms – One important fact is that the transaction cost dynamics are different in different markets and industries – Some characterized by many overlapping IP rights, some by very few More general point: IP operates differently from market to market – We have already discussed some of these distinctions – Plan for today is to add to the discussion of IP across markets and systematize it 3

4. Alternatives to IP If IP is made unavailable because of concerns about transaction costs, how will we get innovation? – Will innovation dry up without incentives provided by IP? To the contrary: there are multiple alternatives 4

5. First-Mover Advantage Significant Not significant 5

6. Network Effects Significant Not significant 6

7. First-Mover Effects and Network Effects First-mover effects and network effects often function powerfully in combination – By being first, a firm can induce consumers to adopt its product – If there are no competitors for a period of time, that firm can capture a large market share Once a firm has a large market share, network effects take over – For many products, marginal value to the next user is an increasing function of the number of users – Very valuable for the next user to consume this product, rather than a competitor – Forces competitors out of the market 7

8. Government Funding Significant Not significant 8

9. Brand Loyalty Significant Not significant 9

10. Trademarks Economics of trademarks are quite different than copyright and patent. Will discuss trademarks in just a few minutes. 10

11. Trade Secrets Significant Not significant 11

12. Alternatives to IP At the same time, there are downsides to some of these alternatives as well – Deadweight loss persists (except sometimes for government funding) – We are only addressing the transaction cost problem With respect to trade secrets: – They never expire (patents have a 20 year term) – No information reaches the public Sometimes socially beneficial to favor patents over trade secrets – Depends a great deal on the economic structure of the industry Now, onto other industry-by-industry distinctions 12

13. Creation/Invention Costs High invention costs Low invention costs 13

14. Creation/Invention Costs High creation costs Low creation costs 14

15. Copying Costs High copying costs Low copying costs 15

16. Number of Relevant IP Rights High number of overlapping rights Low number of rights 16

17. Number of Relevant IP Rights High number of overlapping rights Low number of rights 17

18. Transparency of Rights Highly transparent rights Low transparency of rights 18

19. Typology of IP Markets High invention costs Low invention costs High copying costs High IP: computer chips; semiconductors High IP: none Low IP: works of art; some live performances Low IP: some live performances Low copying costs High IP: consumer electronics; computers; some movies High IP: business methods; business software Low IP: prescription drugs; medical devices; some movies Low IP: consumer software and games; print media and blogs 19

20. Typology of IP Markets High invention costs Low invention costs High copying costs High IP: computer chips; semiconductors High IP: none Low IP: works of art; some live performances Low IP: some live performances Low copying costs High IP: consumer electronics; computers; some movies High IP: business methods; business software Low IP: prescription drugs; medical devices; some movies Low IP: consumer software and games; print media and blogs 20

21. Typology of IP Markets High invention costs Low invention costs High copying costs High IP: computer chips; semiconductors High IP: none Low IP: works of art; some live performances Low IP: some live performances Low copying costs High IP: consumer electronics; computers; some movies High IP: business methods; business software Low IP: prescription drugs; medical devices; some movies Low IP: consumer software and games; print media and blogs 21

22. American Law Across Tech and Media Fields How does American law respond to differences in the economics of IP across technology and media fields? – American law is almost entirely facially neutral – Same patent law for drugs, electronics, semiconductors, software – Same copyright law for music, books – This is true for nearly all other countries as well: China, EU, Japan, etc. But even a facially neutral law can be used to draw distinctions 22

23. American Law Across Tech and Media Fields Burk and Lemley: facially neutral American patent law is applied differently in different industries Multiple tools for this: – Law of obviousness: standard can be higher in some places (software, electronics) and lower in others – Law of utility: standard can be higher in some places (genes) and lower in others – Law of patentable subject matter: standard can be higher in some places (software, business methods, genes) and lower in others 23

24. American Law Across Tech and Media Fields This can be very effective – But it is also a coarse tool. Not finely targeted. One issue is who will implement the differences in law across industries – In the United States, this is almost entirely handled by courts – Burk and Lemley prefer that solution – But could just as easily place the responsibility on an administrative agency, or on the legislature – Which institutions are best equipped to manage complex information economics? (That is the main subject of tomorrow’s class.) 24

25. Trademarks and Brand Loyalty Referenced the value of brand loyalty as an IP substitute several times – But have not yet discussed trademarks – Trademarks are actually another type of IP, just like patents – But have different advantages and disadvantages 25

26. Trademarks Trademarks: property over commercial brands and symbols – Names and symbols of companies and products 26

27. Trademarks Patents and copyrights are fundamentally supply-side IP rights – Idea is to incentivize invention and creation – Create incentives by benefitting the inventors and creators – Increase the supply of inventions and creative works Trademarks are demand-side IP rights – Idea is to provide information to consumers – Trademark tells me about nature, quality of consumer goods – If I think Nike is a high-quality brand, I will know that anything carrying the Nike logo is high quality – If I like to drink Coke, I can guess that I’ll like any Coke products I find 27

28. Trademarks Trademarks also give companies incentives to develop positive reputations – If Apple makes a bad product, it influences our perception of all Apple products – Every time we see the Apple logo, it won’t carry the same indication of quality – Gives Apple an incentive to protect its brand and its reputation All for the purposes of providing information to consumers 28

29. Trademarks and Confusion Of course, that means that companies will try to mimic each other’s valuable trademarks. 29

30. Trademarks and Confusion American law treats trademarks much like patents – They are handled by the same agency: the Patent and Trademark Office – Firms apply for trademarks much as they do patents – A firm that owns a trademark can sue another firm for trademark infringement Key question: “consumer confusion” – Would a consumer, viewing the “infringing” trademark, confuse it for the real one? – Consumers are front and center: question is whether consumers are getting the right information 30

31. Trademarks as IP This means that trademarks and brand loyalty can create market opportunities even when a firm does not have patent protection – Apple and Samsung might manufacture the same smartphone, but if consumers like and trust the Samsung brand they will buy Samsung – Nike and Adidas might manufacture the same shoe, but if customers prefer the Nike brand they will buy Nike This allows a firm to capture returns to innovation – Recall that the problem is Company B free-riding off of Company A – If Company A innovates, it can earn rents even if it cannot protect the innovation so long as its brand is powerful and viewed positively 31

32. Trademarks as IP But note that this only operates in some industries where consumers are heavily involved – Firms do not usually have significant brand loyalty – One firm will buy from whomever makes the best and cheapest product – But consumers certainly can have significant brand loyalty 32

33. Consumer Electronics 33

34. Pharmaceutical Drugs 34

35. Not Creative Goods 35

36. Trademarks as IP Trademark thickets/anticommons are rare – Only when someone gets a “broad” trademark, e.g. “Xerox” – U.S. law attempts to eliminate such trademarks Trademarks can still be mechanisms to create deadweight loss – But at some level, it is consumers who are imposing the deadweight loss upon themselves – Option of buying the less desirable product always exists 36

37. Focus on Two Technology Areas Final topic for today: the operation of IP in two particularly important technological areas: – Prescription drugs – The Smartphone Wars: Apple v. Samsung v. Motorola These are two of the most important areas of technology, where change has come very quickly and IP is tremendously important – Also will shed significant light on economic principles of IP more generally 37

38. Smartphone Wars Basic principle of IP economics: when two firms are both making money selling a product, they rarely want to fight over IP – Most patent lawsuits are brought by firms that are not selling a product – Called “non-practicing entities” or “NPEs” – IP is their only asset, so they assert it – Also, nothing to lose, because they have no products of their own Most common in software, business methods, and computer/electronics fields – Because patent there tend to be non-transparent and broad – Microsoft, Apple, Google – firms like these get sued a lot by NPEs 38

39. Percentage of Lawsuits Brought by NPEs 39

40. NPE Sues Productive Firm Firm A Firm B IP Product IP 40

41. Smartphone Wars Sometimes a firm with a product and IP will sue a firm with a product but no IP – Nothing to lose because cannot be countersued – This occurs most frequently in the context of prescription drugs 41

42. Prescription Drug Company Sues Generic Firm A Product Firm B IP Product 42

43. Smartphone Wars But we very rarely see one firm with IP + product sue another firm with IP + product – The smartphone wars are the prime example of this Main event: Apple v. Samsung all over the globe – Also involves Motorola, Google, and others – Firms are all seeking to block one another from the market – Will talk more about this on Friday when we discuss remedies Very surprising – Maybe originally driven by Steve Jobs’ personality? – Possible end now that Jobs is no longer in charge? 43

44. Smartphone Wars Firm A Product Firm B IP Product IP 44