Economics and patents

Patents are legal instruments intended to encourage innovation by providing a limited monopoly to the inventor (or their assignee) in return for the disclosure of the invention.

This is because patents, by conferring rights on the owner to exclude competitors from the market, presumably offer the incentive for people to study new technology.

In some fields, particularly pharmaceuticals, it is also argued that the monopoly of the patent in the market allows the owner to recover the huge expenses invested in the research and development phase.

The system corrects these mistakes by maintaining the right to nullify inappropriately issued patents.

While private settlement is a cost-effective way to balance the commercial interests of two firms, the public does not benefit from it.

Economists Mark Lemley and Carl Shapiro argued that the patent granting process should be rethought because there are inherent uncertainties with the system.

The first one is the public good problem, which means that once the patent is nullified, the competitors of the accused firm will benefit from the outcome.

The grant of a patent provides the inventor temporarily with an exclusive legal right, thereby securing a means to redeem the costs of research (by charging a higher price for its invention or by license fees from others who wish to practice it).

The major economic effect is the exclusivity period of the patent rights, when exploitation pays back for the enterprise that funded research and development.

For example, worldwide sales of a patented pharmaceutical can be millions of dollars per day, whereas the generic equivalent would later sell for less than half the price.

More directly measurable income is that which is received from the licensing or sale of patent rights, or from successful litigation of infringement.

[18] Contrarily, a strong patent grip could stagnate a narrow market as innovation is no longer justified, eventually resulting in reduced demand (for outmoded and over-priced products), and thus reduced patent value, as the market moves away.

The patent (option) will have value to the buyer (owner) only to the extent that the expected price in the future exceeds the opportunity cost of earning just as much in a risk-less alternative.

[clarification needed][24] See Option pricing approaches under Business valuation for further discussion.