Econ 522 – Lecture 6 (Feb 5 2008)
The first homework in up on the website – due Thursday, February 19 at 1 p.m. SHARP
Also, since the HW questions are a bit different from the types of questions I tend to ask
on exams, I’ve also posted a few sample exam questions on property law – two from past
exams, two old homework problems that “feel more like” exam questions – for when you
guys start to review for the first midterm
In the last three lectures, we posed four questions for property law to address, and took a
crack at answering each of them:
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What things can be privately owned?
o Efficiency suggests private goods should be privately owned, to avoid
the tragedy of the commons
o and public goods should be publicly provided or regulated, so they will
be supplied at the efficient level (to avoid underprovision due to
freeriding)
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What can (and can’t) an owner do with his property?
o Maximum liberty – can do anything you want that doesn’t cause an
externality (infringe on others’ rights/property)
o When two parties’ rights conflict – as with the rancher and the farmer –
Coase suggests whose rights prevail doesn’t matter for efficiency, as long
as the rights are tradable and there are no transaction costs
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How are property rights established?
o Other than whaling and Pierson v. Post, we haven’t said much about this,
but we’ll come back to it soon
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What remedies are given when property rights are violated?
o Discussed this Tuesday – mostly, comparing injunctive relief (property
rules) to damages (liability rules)
o Calabresi and Melamed: property rules (injunctions) are more efficient
when transaction costs are low; liability rules (damages) are more efficient
when transaction costs are high
o Cooter and Ulen: efficient rule depends on what type of information is
more readily available
For the next three lectures, we’ll discuss applications – looking both at how the law is
actually designed, and at whether there is an economic rationale for it.
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To start, I want to introduce one more important idea from game theory, which is the idea
of sequential rationality in dynamic games.
A dynamic game is a game in which one player moves first, then the other player, after
seeing what his opponent did, moves second.
Dynamic games are generally presented via a game tree, where each node of the tree
represents a situation where someone has to make a decision
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Example: suppose there is one firm already operating as a monopolist in some
market, and another firm is considering entering
If he does enter, than the incumbent firm has two choice: he can play nice,
ensuring that both firms end up making money; or he can start a price war,
ensuring that both firms end up losing money
We can represent the game this way:
FIRM 1
Don’t Enter
Enter
FIRM 2
Accommodate
(10, 10)
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(0, 30)
Fight
(-10, -10)
A strategy in this type of game is a plan of what to do at each juncture
So even if firm 1 doesn’t enter, we need to know what firm 2 planned to do if he
did enter
We can also represent this game with a payoff matrix:
Firm 1’s Action:
Enter
Don’t Enter
Firm 2’s Action:
Accommodate
10, 10
0, 30
Fight
-10, -10
0, 30
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And we can circle each firm’s best-response to each action by the other
We find there are two (pure-strategy) Nash equilibria: (Enter, Accommodate), and
(Don’t Enter, Fight).
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However, (Don’t Enter, Fight) isn’t that believable as a prediction
o Firm 1 has no incentive to enter if he believes firm 2 really would fight
o But would it really make sense for firm 2 to fight if it got to that point?
o We say that “fight” here is not a credible threat, since once firm 1 had
entered, firm 2 would actually be better off accommodating
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When we look at dynamic games like this, we’ll look for a stronger type of
equilibrium: Subgame Perfect Equilibrium
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Basically, this is when players don’t just play best-responses in the game as a
whole, but also at every branch of the game tree.
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And the way we find subgame perfect equilibria is by backward induction
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(DO IT)
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The key assumption here is common knowledge of rationality
o The players know each others’ payoff functions, everyone is rational,
everyone knows everyone is rational, everyone knows everyone knows
everyone is rational, and so on
o If you’re playing a game like this against someone who’s crazy, it’s hard
to know what would happen
o And in fact, a “crazy” player – someone who doesn’t always do what’s
best for them – might do better than a “rational” player
o Because if I’m crazy and I’m firm 2, you might believe that I’ll actually
fight if you enter; so you might choose not to enter
o But if you know I’m rational, then you’re better off entering, since you
know that once you enter, I won’t want to fight
o (Literature on repeated games with reputation, where your actions in the
early stages may partly be to try to convince opponents that you’re not a
rational player, and therefore that they shouldn’t try to take advantage of
you in later stages.)
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But for us, we’ll stick to the assumption of rationality – I know that if I move
first, my opponent will do whatever is in his best interest
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This is referred to as sequential rationality – since the players are assumed to be
rational at each stage of the game
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Now, back to property law
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The first application we’ll consider is a non-obvious answer to the question, what
can be privately owned?
And this is the area of information and intellectual property
Intellectual property is a broad term for ways that an individual, or a firm, (or a
university) can claim ownership of information.
There are four areas we’ll look at within information economics:
 patents
 copyright
 trademark
 trade secrets
The general “problem” with information is that it tends to be expensive to create, but then
very cheap to disseminate once it’s been created
 That is, once an idea has been developed – whether it’s a technological
innovation, or a song, a piece of software, or a catchy logo for a company – it is
very easy to imitate or share
 This means that without some sort of intervention, it may be impossible for
whoever developed the idea to recoup the costs – time, effort, and actual money
invested – in coming up with the idea
 And this means that there may not be sufficient incentive to come up with ideas in
the first place
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To see how this works, consider an example
There’s a firm that has some idea for a totally new and innovative product
It’s a good idea: it’s a product that will be valuable to a large number of people
But it’s an idea that will take a large amount of money to develop; and it’s also an
idea that, once it’s out there, will be easy for other firms to imitate
o (A good example of this is a new drug
o A huge amount of money goes into researching drugs, finding one that’s
effective, testing for safety and for side effects, and so on
o But once a drug is released, it may be very easy for other firms to reverseengineer it, figure out how to make it relatively cheaply, and compete with
the firm that developed it.
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So now suppose a firm is deciding whether to make the initial investment in
developing a new drug
They move first, and then another firm moves second and decides whether to
imitate it
Suppose monopoly profits in the market would be $2500, the drug costs $1000 to
develop, but that with two firms, price competition would drive down profits to
$250 each
We can write the game tree this way:
FIRM 1
Don’t Innovate
Innovate
FIRM 2
Copy
(-750, 250)
Don’t Copy
(0, 0)
(1500, 0)
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If we do backward induction, we find that the only subgame perfect equilibrium is
for the second firm to enter if the first develops the product; and therefore, for the
firm not to develop the product
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A patent is one way to solve this problem
A patent is basically a legal monopoly – a patent prevents the second firm from
imitating the first firm’s product, allowing the first firm to function as a
monopolist for a predetermined amount of time
o In the U.S., patents last 20 years from the time of application.
So if the firm’s invention were be protected by a patent, the firm can count on
receiving several years of monopoly profits; which may be enough to cause them
to innovate in the first place.
(Modify the game tree by imposing a large penalty on the imitating firm – the
new SPE is now innovation.)
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A key thing to remember: monopoly is inefficient!
Monopoly pricing always involves a deadweight loss, since a monopolist
maximizes profits by setting price higher than marginal costs
For example, suppose demand for the new drug is Q = 100 – P (DRAW IT)
Suppose the monopolist has 0 marginal costs; then he sets monopoly price at 50,
sells to half the market, gets profit of 2500 and generates consumer surplus of
1250
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But there’s a deadweight loss of 1250 – if the drug were sold for free, it would
generate total surplus of 5000 (all of it going to consumers in this case)
But if the drug were going to be sold free, or cheaply, it might never have been
developed in the first place
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So patents trade off one sort of inefficiency for another.
That is, patents solve the dynamic inefficiency – not enough drugs being
developed – by introducing a static inefficiency – monopoly pricing once the drug
has been developed
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(Of course, once the innovation has occurred, the incentive problem has been
solved, and the inefficiency from the monopoly remains, and can sometimes look
pretty undesirable.
There’s been lots of talk in recent years about the cost of AIDS drugs, most which
are protected by patents.
The manufacturers are pricing them high, to maximize their profits or, arguably,
to recoup the investments they made to develop the drugs in the first place
But it’s hard to not notice that pills which can be produced at a marginal cost of
pennies are priced high enough that they are not available to much of the
developing world.
There have been a number of proposals to try to make them available cheaply (at
cost) in developing countries, but the challenge is how to do that without
undermining profits in the U.S. and Europe)
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A little bit of history
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The power of Congress to legislate both patents and copyrights was actually
written into the Constitution
The first patent law was passed in 1790, and has been updated several times since
At present, patents last for 20 years from the date of application
To be approved, a patent application must satisfy three conditions
o they must be for something which is novel (new), non-obvious, and has
practical utility (basically, is commercializable)
Applications are reviewed by the patent office, which handles a huge volume and
is therefore sometimes criticized for granting patents too easily
In particular, in recent years, there’s been criticism that the “non-obvious” test
had not been applied
o Amazon, for instance, was granted a patent on “one-click purchasing”,
which many thought was an obvious extension of online shopping.
A patentholder who feels his patent has been violated can sue both for damages
already done and for an injunction, stopping the violator from future violations
Thus, patents are protected both by injunctive and damages relief
Patentholders are also free to license their patents to others, that is, to allow others
to use them for a fee (called a royalty).
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When you apply for a patent, the details of your innovation go into the public
record, so in some industries, firms choose not to patent new inventions, instead
choosing to keep them secret.
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There are two important degrees of freedom in patent law: how broad a patent is,
and how long it lasts
The question of breadth can be thought of in a couple of different ways.
First, suppose two different firms are developing distinct, but similar, products
A broad patent on one of the products might cover both
Thus, in a world with broad patents, the two firms might engage in a race – both
try hard to develop the product very quickly, since whoever applies for the patent
first will get all the gains from both products
On the other hand, a narrow patent on one product might not cover the other; in
which case, the firms might develop the products slower (and less expensively),
knowing that both products will exist and that neither one will really have a true
monopoly
So the breadth of patents affects the intensity of the research effort.
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Another way to think of breadth is to suppose that a new product might require
two distinct innovations: one “pioneering invention” that is worth little on its
own, and then the subsequent development of an application, which can be sold
profitably
The question then is, does a patent on the original invention also cover the
application?
Or would separate patents be required for the pioneering invention and the
application?
(A similar question can be asked of whether an improvement to an existing
product is patentable. The question can also be asked in other configurations.)
Courts have sometimes held that an improvement with great commercial value
does not infringe on a pioneering invention that had little standalone value
Such rulings, of course, increase the incentives to invest in applications and
improvements to existing technologies, and decrease the incentives to engage in
fundamental research
On the other hand, when patents on pioneering inventions are held to be broad,
this encourages fundamental research but discourages new firms from attempting
to commercialize existing (but unexploited) technologies
Which of these is preferable depends on the details of a particular industry.
As always, there is Coase – in a world without transaction costs, the initial
allocation of rights should not matter for efficiency – if the patent as initially
granted is inefficient, firms should be able to bargain around it
(That is, as long as the initial grant of the patent gives the inventor enough surplus
to overcome the initial incentive problem, Coase suggests we should be able to
negotiate around any further inefficiencies.)
However, there are several impediments to this.
o Patent law is often ambiguous
o Until a patent has been tested in court, its breadth (and even whether or
not it is valid) are often uncertain
o So firms may not know what their threat points are, and therefore may find
it hard to reach an agreement
o Research itself is often uncertain
o That is, if you make an investment in research or in developing a product,
it is often unpredictable whether you’ll be successful
o Consider the extreme case where a significant investment will lead only to
a small probability of a discovery, but the discovery will be extremely
valuable if it occurs
o If the big discovery may infringe on an existing patent, it’s very hard to
bargain around this problem beforehand – hard to agree on how likely the
discovery is to be made, how valuable it will be, and so on
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o But it’s also risky to make the investment, knowing that you may still have
to share your profits with the other patentholder if the discovery occurs.
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In some areas, there is a sense that there are too many existing patents, and that
it’s very difficult to innovate without infringing on existing patents
In biotech, many new projects require techniques, or even ingredients, that are
patented; so there is a problem of “royalty stacking”, that is, having to pay
multiple monopolists for rights to their good in order to do anything new
(The textbook mentions a Congressional act, and a Supreme Court ruling, meant
to address this problem and encourage the development of new drugs and generic
alternatives to existing ones.)
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On the flip side, I have a friend who does microchip design, who told me that the
conventional wisdom in chip design is, “Never ever try to find out what patents
exist – just design the chip the way you want to, and deal with the patents later.”
o This is because any design is likely to infringe on lots of patents
o Their owners have to decide to sue you for it to matter
o If they do, you may only be liable for damages
o But if they can prove you knew about the patent beforehand, the penalty
may be more severe
o So you’re better off pleading ignorance, which is easier when you actually
are ignorant!
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The problem of research being risky also leads to the problem of “submarine
patents”
o There’s a significant lag (multiple years) between applying for a patent
and it being granted; and the details of the application aren’t made public
until the patent is granted
o So someone could develop a product that infringes on a patent that hadn’t
been granted yet!
o For this reason, in many areas, patents are only valid if you can show that
you were actively trying to commercialize the innovation, not just waiting
around hoping someone else would do the work and then sue them for
infringement
o (This is what happened in a well-publicized case with Blackberry a couple
years ago. Some Canadian firm which had no real business other than
buying other peoples’ patents, claimed to have a patent that Blackberry
was infringing on, and tried to get an injunction to shut down Blackberry
unless they agreed to a huge settlement. In most patent cases, a
preliminary injunction is granted – that is, the injunction is issued in
advance of the case actually going to court. In this case, the injunction
was denied, and the case subsequently went away.)
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Of course, even when low transaction costs would lead to cooperative outcomes,
this can sometimes be a problem in other ways
Often times, firms doing similar research are also competitors in the market; so
attempts to cooperate (through joint research projects or in other ways) may be
viewed suspiciously by antitrust authorities.
(A paper I wrote last year was on patent pools - … Much of the interest in patent
pools stems from the need to figure out how they should be viewed by antitrust
regulators.)
There is also the question of how long a patent should last
Obviously, patents must last long enough for firms to be able to recover their
investment costs, in order to give sufficient incentives for innovation
But since monopolies are inefficient, having patents last too long is bad – once the
patent expires, competition will drive down the price of the product, eliminating
the deadweight loss.
o (When drug patents expire, for example, competing firms can begin
selling generic versions of the same drug – the book gives an example
where the price per pill dropped immediately from $15 to $1, and I think
that’s pretty typical.)
o So the optimal length is a tradeoff between maintaining ex-post
inefficiency versus creating a sufficient incentive for innovation.
o Clearly, the optimal level is likely to vary across different industries
o In the U.S., all patents last the same amount of time, 20 years
o Jeff Bezos, the founder of Amazon, proposed that, since innovation occurs
so fast in the software industry, software patents should expire after 3
years
o In Germany, there are two different types of patents: full-term patents,
which are granted for major inventions; and petty patents, granted for
minor inventions and improvements, which last 3 years
o In addition, in Germany, patentholders must pay an annual fee to continue
the patent, which starts out cheap but escalates over time
o In the U.S., patents used to be renewable under certain conditions – I
believe now they are not.)
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Of course, a patent system is not the only way to encourage innovation; and given
the inefficiency inherent in a monopoly, there may be other ways to do it better
One proposal with drug patents has been that when a particularly valuable drug is
invented, the government should buy the patent, and then allow multiple firms to
produce the drug, leading to lower pricing and higher overall welfare
Since the government could pay the fair value (say, the discounted present value
of expected monopoly profits) to the firm, there is no problem of incentives
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The question then becomes how to correctly calculate the economic value of the
patent itself
(One proposal was to let the market decide – hold an auction for the patent, with
the understanding that once the auction was complete, a coin would be flipped;
with a high probability, the government would buy the patent at that price, but
with some probability, the winner of the auction would buy the patent
This way, a decent estimate of “fair value” could be obtained, and the deadweight
loss associated with monopoly could still be eliminated “most of the time”.)
Another way to give incentives for innovation is through prizes
 A couple years ago, Google announced a $30 million prize for any private citizen
landing a rover on the moon
 Similar prizes have been offered by governments, and by private foundations, to
encourage innovation in particular directions
And finally, government (or a private foundation) can simply give grants to subsidize
research directly – which they do – reducing the need for ex-post incentives.
So that’s patents. Next up are copyrights.
Copyrights are property rights over “original expressions” – writing, music, or other
artistic creations
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Creations like this tend to fit the definition of a public good
o nonrivalrous – one more person reading a book, or listening to a song, or
using a piece of software, doesn’t impose any costs on the creator or on
other users
o nonexcludable – this isn’t quite as literally true; but technology has made
it very cheap, often free, to copy and share music or software, so in some
instances it’s very difficult to prevent people from accessing it
o (This has become more dramatically true in the last decade – once
something is available digitally, it’s very hard to limit access to it.)
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So it is natural to think of creations like these in terms of public goods
As with any public good, if they are privately supplied, we would expect them to
be undersupplied
That is, without any specific sort of reward system, creators could not capture the
full social benefit of their creations, and so the free market would likely produce
an inefficiently low level of “original expressions.”
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However, there are several possible ways to remedy this problem:
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Have the government subsidize it, that is, have it publicly supplied
o This happens with scientific research, since scientific knowledge can also
be thought of as a public good; and it happens with art
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Another is for these activities to be paid for with charitable donations
o This is implicitly what happens with shareware – you download it for free,
but are asked to pay for it voluntarily if you use it
o (Of course there’s the usual freerider problem.)
o And a lot of art is supported by private foundations and donations.
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Finally, the creator of a song, or of a computer program, can be given legal rights
to it, which make it illegal for others to disseminate it, so that in order to use it
legally, people have to buy it from the creator (or from someone else who pays
fees to the creator)
This last one is the case of copyright – exclusive legal rights to written material.
Copyright law is less rigid than patent law
 Patents serve as injunctions against any unauthorized use of the idea
 But copyright law allows for certain exceptions
 For example, a few lectures ago, I handed out Xerox copies of the amputated leg
story
 The article was copyrighted, but I wasn’t breaking the law by handing out copies,
because educational use is recognized as “fair use” of copyrighted material, and is
therefore exempt
 Similarly, small selections from a book can legally be quoted in reviews, or used
in satires, and pieces of songs can be sampled in other songs.
On the other hand, copyrights last much longer than patents
 the lifetime of a copyright has been extended several times
 in the U.S., copyrights currently expire 70 years after the death of the creator
Unlike patents, you don’t have to apply for a copyright – it automatically applies to
anything you’ve written or created.
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Copyrights are generally more narrow than patents
 In theory, they cover only the specific text, not the general idea, of a creation
 Although this line is sometimes a bit vague
o In 2001, Alice Randall published the book “The Wind Done Gone,” which
was meant as a retelling of “Gone With The Wind” from the point of view
of a slave on Scarlett’s plantation
o The estate of Margaret Mitchell sued the book’s publisher; an injunction
was initially issued, halting publication, but was later overturned; in the
end, a settlement was reached.
o In this case, though, even if the book did violate the copyright, it’s hard to
see any financial damage to Mitchell’s estate
o That is, it’s hard to imagine there are many people who would see an
“unauthorized parody” as a substitute for the original; hard to imagine a
lot of people who planned to buy a copy of Gone With The Wind, then
read the parody and felt they no longer needed to.
o In my own opinion, copyright holders sometimes defend their copyright
aggressively as a reflex, without giving much thought to whether the
activity they’re opposing actually hurts their interests
o Lots of book publishers were opposed to Google Book Search, which
would allow people to search the text of books, but would only return the
relevant paragraph, not the whole work
o Again, it’s hard to imagine that searching for a phrase or an idea, and
finding it contained in a book you didn’t know about, would make you
less likely to buy that book; yet the publishers felt some instinctive need to
oppose the idea
o (Google Book Search is now mostly limited to books in the public
domain, that is, works whose copyrights have expired or which are not
protected by copyright for other reasons.)
o A similar argument could be made about the well-publicized RIAA
lawsuits against music downloaders
o (There is little doubt that unlicensed copying of music does violate
copyright; there is less clarity that treating potential customers as criminals
is the best long-term strategy for the music and movie industries.)
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(Commenting on the lengthening of copyright life, Cooter and Ulen comment that
technology has made it easier to avoid paying copyright royalties, and that the
lengthening of copyright therefore “allows creators a longer time to recoup their
just royalties.”
I wince at the use of the word “just”
They seem to be implying that intellectual property protection is somehow the
natural state of the world, or a moral imperative, that these rights are somehow
inherent and deserved
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People forget sometimes that the protection of intellectual property is artificial, a
man-made legal creation
Copyright holders lobby for strengthening copyright law because that’s in their
own financial interest, just like patentholders lobby for stronger patent protection
because it’s in their interest
There may be many good reasons for an author to have certain exclusive rights to
their own work, but these rights are a calculated invention, not a natural or moral
entitlement.)
Separate from that, one could wonder whether the royalties received between, say,
year 40 and year 70 after your own death really enter into one’s calculations when
deciding how much time to invest in writing a book or a song
so if we see copyrights, like patents, as existing mainly to give an incentive for
creation, it may be hard to argue there’s an added benefit in having them last this
long
Probably less controversial than patents and copyrights are trademarks
 This is protection for distinctive commercial symbols such as McDonald’s golden
arches and Nike’s swoosh
 Trademark protection prevents competitors from putting the same mark on their
products; thus, it helps establish who a product is made by, allowing consumers to
rely on a firm’s or a product’s reputation for quality
 To put it another way, when competing products are indistinguishable from each
other, or when producers deliberately make it unclear whose product is whose,
producers don’t have much incentive to make better products, since they won’t be
rewarded with higher sales
 By certifying the identity of a particular brand of product, trademarks give firms
more of an incentive to create higher-quality goods; and they give consumers less
uncertainty about the goods they’re buying.
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Unlike other forms of intellectual property, trademarks last forever, unless they
are abandoned
Makes some sense – unlike patents and copyrights, there doesn’t seem to be the
same tradeoff of long-term incentives versus short-term inefficiency.
Generic names cannot be trademarked – for example, nobody can trademark the
word “camera”, and sue anyone else who advertises a product called a camera
Sometimes, this goes in the other direction: occasionally, a brand-name product is
so successful that their name becomes synonymous with the product
“Kleenex,” “Xerox,” “Scotch tape,” and “Band-Aid” are all commonly used to
refer to generic products
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The name “Aspirin” was once the name of acetacylicilic acid sold by the Sterling
Drug Company; in 1921, a federal court ruled that the name had become the
common word for the drug, and other companies were allowed to start using the
term “aspirin.”
(Bayer currently holds a trademark on the word “aspirin” in Mexico and Canada,
where nobody else can sell a product with that name.)
The book also talks about a program by Coca-Cola, which employs 25
“investigators” who order Coke all over the place and analyze what they’re given,
in an effort to ensure that people don’t start using the term to refer to any generic
soda and destroy the trademark
One more funny aside about trademarks…
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In 1989, when Toyota introduced the Lexus name (L-E-X-U-S), they were sued
by Lexis (L-E-X-I-S), a company that provides searches of legal sources (now
Lexis-Nexis, which those of you who go to law school will get to know quite
well)
The court ruled for the car company, saying they were not infringing.
The first time I taught this class, I stumbled on an article that for the second time
in a year, Toyota was suing a porn star who’s adopted the stage name “Lexus”
Taken together, these seem to suggest that Toyota believes that:
 you are unlikely to mistake a luxury car for an online legal search
 but you might mistake a luxury car for gay porn
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Of course, this isn’t really what they’re claiming
Obviously, trademark law prohibits someone else from selling a soft drink
called Coca-Cola
Less obviously, it also prohibits someone else from selling, say, a clothing
line or a sandwich meat called Coca-Cola
The legal doctrine here is “dilution of the distinctive quality of a mark or
trade name,” which can be claimed even in “the absence of competition
between the parties or the absence of confusion as to the source of goods
or services.”
That is, once you’ve established a brand name, people can’t use it in a way
that hurts its image, even if it doesn’t create genuine confusion about
whose products are whose.
The economic argument for trademark protection seemed pretty clear –
reduce buyer uncertainty, increase seller incentives to maintain a
reputation for quality
The argument against trademark dilution is a bit harder – seems more to
be protecting vested interest
But I thought it was interesting
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The final type of legal protection for information is the protection of trade secrets

A trade secret is any information "used in one's business" that gives its owner "an
opportunity to obtain an advantage over competitors who do not know or use it."

For instance, the exact formula for Coca-Cola or for the Big Mac “special sauce”
are supposedly closely-guarded trade secrets
In order to charge someone with misappropriating a trade secret, I have to show three
things:
 One, that it is a valid trade secret, that is, that it is commercially valuable, and that
it was not already commonly known throughout the industry.
 Two, that they acquired it illegally. Buying my product and reverse-engineering
how I built it is not illegal. However, breaking into my lab and stealing my notes
is.
 Three, that I took reasonable steps to protect it.
Trade secrets behave like property – they can be transferred or sold
 The protection does not expire, as long as the secret remains a secret
 Trade secret protection is limited, however
 Suppose my firm hires an engineer to work on a secret project, and I have him
sign a non-disclosure agreement, agreeing not to disclose my secrets
 After a while, he quits, and begins working for my competitor
 If he reveals my secrets to them, I can sue him for breach of contract
 But if my competitor did not know about the contract, I have no recourse against
them, and now they have my secret.
(Nondisclosure agreements tend to be difficult to enforce. Particularly in Silicon Valley,
where people change jobs very frequently, trade secret protection is not felt to be
particularly effective. Kozmo/Urbanfetch)
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