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 publication of the details of the invention protected by the patent. Innovation is encouraged because an inventor can secure a monopoly, and therefore financial rewards in the market place, in return for the development of new technology. There are arguments that rather than encouraging market development, patents actually hinder it by the creation of artificial monopolies.

Macroeconomic perspective

The patent system has an impact on the economy as a whole. The benefits of new research, once the research is publicly known, are available to the whole economy in the relevent field, thereby bringing advantages to all parties in that field, and hence diluting the benefit to the party performing the research. Research is an expensive process and due to this dilution of benefit, a party is unlikely to redeem their expense and there is therefore little benefit in a party conducting research and innovating. The grant of patent, however, provides the inventor with a monopoly, thereby securing a means to redeem the costs of research. Invention and advance is thereby advanced as people are encouraged to research and invent by the financial rewards of doing so.

Microeconomic perspective

The economics surrounding a single patent, or group of patents, revolved around the balance between the expense of obtaining and maintaining the patent(s), and the income from that/those patents.

Income from a patent is difficult to measure due to the fact that a patent is an exclusionary right - preventing others from entering the market - and so its effect may be to increase the patent proprietors income from that market. However, it is difficult to determine what that increase is. More directly measurably income is that received from the licensing or sale or patent rights.

The right to exclude others from entering your market is, however, potentially extremely valuable as it potentially provides the patent proprietor with total exclusivity in that market for the duration of the patent (generally 20 years from filing). A good example of the financial rewards available to the small business from excluding large competitors from a market is the success of the Dyson vacuum cleaner.

Patent valuation

In 2005, the European Commission published a comprehensive study of the value of patents for patent owners as well as for the European economy. The title of the survey was “Study on Evaluation the Knowledge Economy – What are Patents Actually Worth?” [1]. The study was in part based on a survey of 20,000 patent owners who filed EPO patents between 1993 and 1997. The survey was performed in 2003. 9000 patent owners responded. The patent owners were asked how much effort was required to produce their inventions and how much monetary value their patents had been worth. The median effort to create the patentable invention was 1 person-year, with 10% patent owners requiring 2 or more person-years. The median value of the patents produced was €300,000, with 10% of patent owners reporting values of €10 million Euros or more.

See also

• Business method patent
• Patentability
• Software patent debate
• Sufficiency of disclosure