Knowledge, competition and
appropriability
Is strong IPR protection always needed for more and better
innovations?
G. Dosi1
1 St.
L. Marengo1
C. Pasquali 2
Anna School of Advanced Studies, Pisa
2 University
of Teramo
The problem
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The idea that a positive and uniform relation between
innovation and strong IP protection is based on a standard
market-failure, positive externalities argument, which
assumes:
1. a specific representation of knowledge and its nature
(knowledge = codified information (Arrow, 1962), i.e.
non-rival, hardly excludable and easily transferred)
2. a specific representation of markets and their functioning
(perfect competition model: price competition on
homogeneous products)
3. an assumption of rationality of innovators who anticipate
the erosion of returns and thus do not engage in innovative
activities
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. . . but points 1 and 2 contrast with (most of) what we know
on the economics of technological change; on 3 we know
almost nothing
Our thesis
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if we start from a richer picture of knowledge and
competition the economic foundations of IPRs become
less clear:
1. the nature of knowledge and competition have a strong
impact on appropriability regimes and IPRs dynamic
efficiency
2. knowledge and competition features are highly technology-,
industry-, and firm-specific 7→ variety of appropriability
regimes
Outline
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(brief) discussion of the assumptions on knowledge
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(brief) discussion of the assumptions on competition
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(brief and informal) outline of an evolutionary model of
industry dynamics
Market failures
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The classical argument for strong IPRs in the form of
legally enforced rights is based on the idea of market
failure:
1. Knowledge is a (to a large extent) public good: it will be
underproduced and it will receive insufficient investments.
2. An artificial scarcity is thus created to amend non rivalry
and non excludability in such a way that an appropriate
degree of appropriability of returns from R&D investments
is set.
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The problem then becomes that of balancing out the
detrimental effect of deadweight loss implied by a legally
enforced monopoly and the beneficial effect of knowledge
dissemination and investments in R & D.
Some questions about knowledge
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knowledge = information?
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tacitness and non-codifiability;
imitation is costly (Mansfield) and requires absorptive
competencies and assets (Cohen-Levinthal);
are digital goods an exception?
knowledge = quasi public good?
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non-rivarly vs. expansibility (David)
embodied vs. disembodied technological knowledge
(Boldrin-Levine, Quah)
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“innovation” as a well-defined, discrete event?
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complementary knowledge, physical and organizational
assets not available at competitive prices (Teece)
cumulative/sequential knowledge (Bessen-Maskin,
Scotchmer)
complexity and interdependencies in knowledge (patent
thickets, tragedy of anti-commons, and more in general
non separabilities)
technological opportunities:
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where do they come from? (exogenous vs. endogenous
opportunities)
to what extent are determined by incentives?
Some consequences
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imitation and diffusion is costly and problematic
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appropriability issue more general than IPR issue: control
of complementary assets and contractual/transaction costs
issues
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. . . technology-, industry-, and organization- specific
knowledge dimensions: complexity, cumulativeness,
opportunities
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interdependencies limit the efficiency of the property rights
/ market solution to the coordination problem
Markets and their functioning
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the benchmark is the static efficiency of resource allocation
in the perfect competition model
however:
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this notion is hardly relevant in terms of empirical and
descriptive adequacy
markets are also places in which novelty is (imperfectly)
produced, (imperfectly) tested and (imperfectly) selected
(variation + selection)
product innovations often create quasi-independent
sub-markets and competitive processes are displaced
before they settle into an “efficient” equilibrium
Some consequences
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IPRs do not only determine a hypothetic static efficiency
but also the dynamic path of innovation
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IPRs have an influence on technological opportunities as
they drive the new product generation mechanism
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IPRs set constraints to which paths can be followed, as
some of them are blocked by patents
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. . . especially if knowledge is “complex”, i.e.
complementary or interdependent
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e.g. patent thickets, tragedy of anti-commons
Towards a more realistic model
Main features:
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product innovation, where products are complex systems
of interdependent components (complex product space);
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innovation can generate new products weakly (or not at all)
competing with existing ones if enough differentiated in the
product space (sub-markets)
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imitation is costly and problematic
(complex/interdependent systems cannot be usually
imitated “piecewise”)
Main features continues:
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R&D investment is a boundedly rational routinized decision
subject to adaptive learning (cf. models of Schumpeterian
competition à la Nelson and Winter)
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firms decide the amount of innovative R&D; imitative R&D
and scope of R&D (how many product dimensions do
research on)
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patentability standard and patent breadth are defined on
the product metric space
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patent “coarseness”: what gets patented, a product system
or single components?
Knowledge complexity
An anti-Coasian perspective: coarse vs. fine IPRs
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Coase: IPRs internalize knowledge externalities: finer
IPRs bring higher efficiency (transactions costs aside)
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but finer IPRs put more constraints on innovation paths
and block useful recombinations of interdependent pieces
of knowledge
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non-neutrality of IPRs with respect to innovation paths
Some results
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patents increase R&D intensity (though this is not
determined by rational calculation but by adaptation and
selection)
but overall R&D expenditure, overall product quality and
social welfare may be lower with patents than without
them, because:
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patents deter imitative entry
patents increase concentration
net effect depends upon:
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exogenous vs. endogenous technological opportunities
sub-markets differentiation
product space complexity
Knowledge complexity
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as knowledge complexity increases, “finer” patents on
single components decrease overall product quality and
social welfare for three reasons:
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prevent all imitation
favor firms doing specialized R&D on single components
against those pursuing systemic innovation
prevent useful re-combinations of existing pieces of
knowledge
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. . . however they increase variety across products and firms
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competitive pressure towards excessively “fine” IPRs and
over-modularization of R&D