Do Legal Rules Deliver Effective Economic Outcomes?
Chapter 2: The economics of patent policy: assumptions, paradoxes and evidence
The principal economic argument supporting patent policy is founded on the assumption that copying knowledge is virtually free. Once an innovator has developed a new artefact or process, competitors are able to replicate this at very low cost, undercutting the original innovator in the market. They can price close to marginal cost as they do not have to recoup the overhead costs of developing the new knowledge. This argument also implies that very little time is needed to copy the new knowledge to the point of having a fully developed competing product in the market, so that the original innovator has little if any period of market exclusivity. An alternative view, derived from the information economics school of thought, considers that it takes both time and money to learn and use new knowledge. Indeed the cost of acquiring new knowledge is sufficiently high that it is a barrier to the diffusion of new technology. This alternative perspective draws the conclusion that many new industrial artefacts and processes will have a period of exclusivity in the market when there are no competing products.
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