1. © Suzanne Scotchmer 2007 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0 Attribution-NoDerivs-NonCommercial Common Deed 1.0 The Problem of Cumulativeness Two Basic problems: –It is hard to compensate an early innovator for his contributions to later innovators. (What is the vehicle for compensating the early innovator?) –The market may punish early innovators for teaching technologies to later innovators Can IP solve these problems? What is the problem with Strong protection to first innovator: everything infringes Weak protection to first innovator: nothing infringes Examples: laser, indigenous knowledge, inkjet printer Research Tools Basic and Applied Research Quality Ladders

2. © Suzanne Scotchmer 2007 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0 Attribution-NoDerivs-NonCommercial Common Deed 1.0 Example: Masers and Lasers Laser or Maser: Device to create a coherent (single direction, single frequency) electromagnetic wave. Has high energy, is useful for lots of things, like reading and writing CD’s, eye surgery, carrying info in fiber-optics. Scientific Underpinning: Einstein 1916 paper. Pointed out that coherent photons would be emitted from an “excited” atom when bombarded with a single photon (amplification). Engineering aspect: Need the right medium. First Implementation, the Maser (Charles Townes 1954). (microwave part of the spectrum) Second Implementation, the Laser (Towns and Schawlow, idea published 1958, patent issued 1960). (visible part of the spectrum)

3. © Suzanne Scotchmer 2007 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0 Attribution-NoDerivs-NonCommercial Common Deed 1.0 The 1960’s: Nobel prizes. New mediums for excited atoms (solid-state, gas, ruby, in the 1980’s semiconductors) 1960’s to 1980’s New uses surgery, printers, communications, spectroscopy Patent battles I: Townes’ maser patent assigned to Res. Corp. Townes’&Schawlow’s laser assigned to Bell Lab Research Corp sued Bell Lab (blocking patents) Patent battles II: Gordon Gould, laser contender, applied for laser patent 1957, awarded 1977, after a partial revocation of the Townes/Schawlow laser patent.

4. © Suzanne Scotchmer 2007 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0 Attribution-NoDerivs-NonCommercial Common Deed 1.0 Lessons of the Laser wars Cumulativeness: Science (Einstein) to Basic Research (Maser) to War Research (radar) to Applications (Laser plus uses) http://www.patentweb.de/laser/patents.html Who deserves credit? (Everyone here.) Who gets the profit? Townes made about $1m total. Gould patents eventually made about $17m per year. Better to be late, but not never. (BTW, CD’s) Einstein earned nothing. Did any of these inventors need “incentives?” Importance of reduction to practice: There was delay in filing; was a description enough? Working model?

5. © Suzanne Scotchmer 2007 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0 Attribution-NoDerivs-NonCommercial Common Deed 1.0 Tool 1 (insert genes) Application Or Use (germplasm) Tool 2 (genetic trait) Tool 3 (expression gene) Research Tools and Inventions

6. © Suzanne Scotchmer 2007 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0 Attribution-NoDerivs-NonCommercial Common Deed 1.0 Complementary Goods sold by two monopolist tool owners. Each user (indexed by z) requires both tools to develop his product. The prices of the tools will end up being higher than the profit-maximizing price. (see next slide as well.)

7. © Suzanne Scotchmer 2007 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0 Attribution-NoDerivs-NonCommercial Common Deed 1.0 1 1/4 price 1/2 If one firm increases price, half the loss due to lost sales is accrued by the other firm. Starting at the monopoly price, Each firm has a unilateral incentive to increase price

8. © Suzanne Scotchmer 2007 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0 Attribution-NoDerivs-NonCommercial Common Deed 1.0 Bottom Line: The separate monopoly prices (added together) are higher than the joined monopoly price.

9. © Suzanne Scotchmer 2007 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0 Attribution-NoDerivs-NonCommercial Common Deed 1.0 Research Tool or Basic Research (Laser) Application 2 (Laser Surgery) Application 1 (Reading/writing CDs) Application 3 (Spectroscopy) Basic & Applied Research (1) Will infringement deter investment in applications? (2) Is the 2 nd innovator better off if Infringement deters his investment? (3) If applications are not patentable, how does that affect investment?

10. © Suzanne Scotchmer 2007 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0 Attribution-NoDerivs-NonCommercial Common Deed 1.0 Breadth on a quality ladder (computer chips) q1q1 q2q2 q3q3 q4q4 Benefit of each improvement: /r Cost of each improvement: c Profit earned by each improvement: Basic Problem: There is a large discrepancy between the profit and social value of each incremental improvement:

11. © Suzanne Scotchmer 2007 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0 Attribution-NoDerivs-NonCommercial Common Deed 1.0 Intellectual Property on a quality ladder. q1q1 q2q2 q3q3 q4q4 q5q5 2 2 Benefit of each improvement: /r Cost of each improvement: c Flow of profit earned by each improvement: Two Tools of IP: patentable step and breadth (infringement) Solves the economic conflict (“enough” consolidation) Basic Problem: There is a large discrepancy between the profit and social value of each incremental improvement:

12. © Suzanne Scotchmer 2007 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0 Attribution-NoDerivs-NonCommercial Common Deed 1.0 Inkjet Printer What are the cumulative aspects? What are the independent invention aspects? Where does the question of patent breadth arise? (At the user level? Technology level? What does this mean for inventing around?) Hewlett-Packard and Canon filed patents on many key inventions within months of one another. What do you make of this paragraph: …The result was a relationship between Canon and HP that continues to this day. Hewlett-Packard has borrowed some of Canon's designs for extending the life of the print head, while Canon has borrowed from HP's ideas for print-head configuration. Despite brief disagreements over rights to the technology, Hewlett-Packard insists that the co-operation has developed into a healthy competitive relationship between the two companies, and moved the state of the art further than it would otherwise have gone.

13. © Suzanne Scotchmer 2007 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0 Attribution-NoDerivs-NonCommercial Common Deed 1.0 Inkjet printer. Discuss: Should there be an independent invention defense? (There is more or less such a defense in copyright, but not patents.) What issues are raised for competition policy and patents? Is the world better off because the firms share knowledge? How is that reconciled with competition issues?

14. © Suzanne Scotchmer 2007 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0 Attribution-NoDerivs-NonCommercial Common Deed 1.0 Example: Indigenous Knowledge Basmati Rice: Developed over generations in Pakistan, India and elsewhere. Adapted by genetic methods to growing conditions in Texas (what about water!?) Challenges the export market of Pakistan. How should we think about this? Moral rights? Economic rights? Equity versus efficiency?

15. © Suzanne Scotchmer 2007 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0 Attribution-NoDerivs-NonCommercial Common Deed 1.0 Example: Neem Tree, also India Medicinal and pesticide properties The oil is unstable, so traditional use involves culling the oil, and using immediately. Biotech firm found a way to stabilize the oil, re- exports it to India. How should we think about this?

16. © Suzanne Scotchmer 2007 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0 Attribution-NoDerivs-NonCommercial Common Deed 1.0 Example: Light Bulbs Humphrey Davi 1801 patented electric incandescent light made with a current between strips of platinum. Not useful; filament burned too quickly. Remaining development: find the right filament, and keep it from burning (vacuum bulb). Eventual solution was carbon filaments, then tungsten 1860 Swan patent. Carbon filament in vacuum bulb. Still inefficient, but is the design still used. 1878 Edison, carbonised cotton thread. Lasted longer. Then carbonized bamboo, then tungsten 1907 Infringement fight betw Swan and Edison ended in a joint company 1883.

17. © Suzanne Scotchmer 2007 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed 1.0 Attribution-NoDerivs-NonCommercial Common Deed 1.0 The Virtues of Sharing Knowledge The winner with knowledge sharing The winner with data hoarding time