Econ 522
Economics of Law
Dan Quint
Spring 2010
Lecture 7
back to
Intellectual
Property
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Intellectual Property
 Intellectual property: broad term for ways that an individual,
or a firm, can claim ownership of information

Patents – cover products, commercial processes

Copyrights – written ideas (books, music, computer programs)

Trademarks – brand names, logos

Trade Secrets
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up-front investment: 1,000
monopoly profits: 2,500
duopoly profits: 250 each
Example of a patent:
creating a new drug
FIRM 1 (innovator)
FIRM 2 (imitator)
Innovate
Don’t
Without patents:

Drug never
discovered
(0, 0)
Imitate
(-750, 250)
Don’t
(1500, 0)
FIRM 1 (innovator)
 With patents:


Drug gets
discovered
But…
FIRM 2 (imitator)
Innovate
Don’t
(0, 0)
Imitate
(-750, 250 – P)
Don’t
(1500, 0)
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Since monopoly is inefficient, important
tradeoffs in patent design
 Patent breadth
 Patent length

tradeoff: how long to maintain ex-post inefficiency (monopoly) to
create enough incentive for innovation?
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Since monopoly is inefficient, important
tradeoffs in patent design
 Patent breadth
 Patent length

tradeoff: how long to maintain ex-post inefficiency (monopoly) to
create enough incentive for innovation?
 Alternatives to patents



government purchase of drug patents
prizes
direct government funding of research
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patents
copyrights
trademarks
trade secrets
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Copyright
 Property rights over original expressions

writing, music, other artistic creations
 These tend to fit definition of public goods



nonrivalrous
nonexcludable
so private supply would lead to undersupply
 Several possible solutions



government subsidies
charitable donations
legal rights to creations – copyrights
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Copyright
 Copyright law less rigid than patent law

Unlike patent law, allows for certain exceptions
 Copyrights last much longer than patents

Current U.S. law: copyright expires 70 years after creator’s death
 No application process

Copyright law automatically applies to anything you’ve
written/created
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Copyright
 Copyright law less rigid than patent law

Unlike patent law, allows for certain exceptions
 Copyrights last much longer than patents

Current U.S. law: copyright expires 70 years after creator’s death
 No application process

Copyright law automatically applies to anything you’ve
written/created
 Copyrights more narrow than patents

Cover exact text, not general idea
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Copyright
 Copyright law less rigid than patent law

Unlike patent law, allows for certain exceptions
 Copyrights last much longer than patents

Current U.S. law: copyright expires 70 years after creator’s death
 No application process

Copyright law automatically applies to anything you’ve
written/created
 Copyrights more narrow than patents

Cover exact text, not general idea
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patents
copyrights
trademarks
trade secrets
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Trademarks
 Trademarks do not expire, as long as they’re not
“abandoned”

No trade-off between long-term incentives (innovation) and shortterm inefficiency (monopoly) – little apparent downside
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Trademarks
 Trademarks do not expire, as long as they’re not
“abandoned”

No trade-off between long-term incentives (innovation) and shortterm inefficiency (monopoly) – little apparent downside
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Trademarks
 Trademarks do not expire, as long as they’re not
“abandoned”

No trade-off between long-term incentives (innovation) and shortterm inefficiency (monopoly) – little apparent downside
 Protected against infringement and also dilution
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patents
copyrights
trademarks
trade secrets
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Trade Secrets
 Protection against misappropriation
 But plaintiff must show…



Valid trade secret
Acquired illegally
Reasonable steps taken to protect it
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patents
copyrights
trademarks
trade secrets
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More on: what can be
privately owned?
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Organizations
 Most organizations are not owned by anyone

churches, clubs, cooperatives, charities, etc.
 But many corporations are owned

can be bought and sold like property
 General principle:


Organizations whose primary purpose is to earn profits
should be owned
Organizations whose primary purpose is something else
should not
 Ownership leads to a principal-agent problem
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Multiple forms of public ownership
 Open Access



Anyone free to use the resource
Leads to overutilization (Tragedy of the Commons)
Example: oyster beds
 Unanimous Consent



Opposite of open access – multiple owners must all agree to any
use of the resource
Leads to underutilization
Example: empty storefronts in post-Communist Moscow
 Political Control/Regulation
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Third form of public ownership: political
control/regulation
Dividing the mountain pasture among individual owners
would require fencing it, which is prohibitively expensive.
Instead, the highland pasture is held in common, with each
village owning different pastures that are separated by
natural features such as lakes and mountain peaks.
If each person in the village could place as many sheep as
he or she wanted in the common pasture, the meadows
might be destroyed and eroded by overuse.
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Third form of public ownership: political
control/regulation
In fact, the common pastures in the mountains of Iceland
have not been overused and destroyed, because the
villages have effective systems of governance.
They have adopted rules to protect and preserve the
common pasture. The sheep are grazed in common
pasture in the mountains during the summer and then
returned to individual farms in the valleys during the winter.
The total number of sheep allowed in the mountain pasture
during the summer is adjusted to its carrying capacity.
Each member of the village receives a share of the total in
proportion to the amount of farmland where he or she
raises hay to feed the sheep in the winter.
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How are property rights
established/verified?
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Fugitive property
 Hammonds v. Central
Kentucky Natural Gas Co.




Central Kentucky leased
tracts of land above natural
gas deposits
But geological dome lay
partly under Hammonds’
land
Hammonds sued, claiming
some of the gas they were
extracting was his
(Anybody see “There Will
Be Blood”?)
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Two principles for establishing ownership
 First Possession


fugitive property belongs to nobody until someone extracts it,
establishing ownership
Central Kentucky would own all the gas, since they were first to
actually possess it
 Tied Ownership



ownership of fugitive property is tied to something else which is
easier to establish – in this case, surface of the land
Hammonds would own some of the gas, since it was located under
his land
principle of accession – a new thing is owned by the owner of the
proximate or prominent property
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First Possession versus Tied Ownership
 First Possession


generally simpler to apply – easy to determine who possessed
property first
but, incentive to invest too much to early in order to establish
ownership
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First Possession versus Tied Ownership
 First Possession


generally simpler to apply – easy to determine who possessed
property first
but, incentive to invest too much to early in order to establish
ownership
 Tied Ownership


encourages efficient use of the resource (no need to extract quickly)
but, difficulty of establishing and verifying ownership rights
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This brings us to the following tradeoff:
Rules that link ownership to possession have the
advantage of being easy to administer,
and the disadvantage of providing incentives for
uneconomic investment in possessory acts.
Rules that allow ownership without possession have
the advantage of avoiding preemptive investment
and the disadvantage of being costly to administer.
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A nice historical example: the Homestead
Act of 1862
 Meant to encourage settlement of the Western U.S.
 Citizens could acquire 160 acres of land for free, provided



head of a family or 21 years old
“for the purpose of actual cultivation, and not… for the use or
benefit of someone else”
had to live on the claim for 6 months and make “suitable”
improvements
 Basically a first possession rule for land – by living on the
land, you gained ownership of it
 Friedman: caused people to spend inefficiently much to
gain ownership of the land
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Friedman on the Homestead Act of 1862
“The year is 1862; the piece of land we are considering is… too far from railroads,
feed stores, and other people to be cultivated at a profit.
…The efficient rule would be to start farming the land the first year that doing so
becomes profitable, say 1890. But if you set out to homestead the land in 1890,
you will get an unpleasant surprise: someone else is already there.
…If you want to get the land you will have to come early. By farming it at a loss for
a few years you can acquire the right to farm it thereafter at a profit.
How early will you have to come? Assume the value of the land in 1890 is going to
be $20,000, representing the present value of the profit that can be made by
farming it from then on. Further assume that the loss from farming it earlier than
that is $1,000 a year. If you try to homestead it in 1880, you again find the land
already taken. Someone who homesteads in 1880 pays $10,000 in losses for
$20,000 in real estate – not as good as getting it for free, but still an attractive deal.
…The land will be claimed about 1870, just early enough so that the losses in the
early years balance the later gains.
It follows that the effect of the Homestead Act was to wipe out, in costs of
premature farming, a large part of the land value of the United States.”
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When should resources become privately
owned?
 First Possession and Tied Ownership are doctrines for how
ownership rights are determined
 Next question: when should a resource become privately
owned?



Cost of private ownership: owners must take steps to make the
resource excludable – boundary maintenance
Cost of public ownership: congestion and overuse
An economically rational society will privatize a resource at the
point in time where boundary maintenance costs less than the
waste from overuse of the resource.
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When should resources become privately
owned?
 First Possession and Tied Ownership are doctrines for how
ownership rights are determined
 Next question: when should a resource become privately
owned?



Cost of private ownership: owners must take steps to make the
resource excludable – boundary maintenance
Cost of public ownership: congestion and overuse
An economically rational society will privatize a resource at the
point in time where boundary maintenance costs less than the
waste from overuse of the resource.


(either because congestion got worse…
or because boundary maintenance became cheaper)
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What can be done to prove ownership of
something?
 Branding cattle
 Vehicle ID numbers
on cars
 States grant deeds for
property, and keep
registry of legal owner
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What can be done to prove ownership of
something?
 Branding cattle
 Vehicle ID numbers
on cars
 States grant deeds for
property, and keep
registry of legal owner
 No such system for apples


Too many apples – high cost of maintaining a registry
Apples inexpensive – not much of a problem
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That’s all for today
 Next week:




limitations/exceptions to property law
more on remedies
governmental takings (eminent domain)
and an interesting (hopefully) experiment
 If you want to read ahead: Blume and Rubinfeld article
 Have a good weekend!
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