[rayiner]

That may be true, but I suspect you're underestimating the value created by patents. Three examples:

1) Patents enable "benevolent monopolies." Companies that can afford to splurge on fundamental research because they have a revenue source protected by some sort of barrier to entry or network effect. Xerox PARC, for example, created many of the technologies fundamental to modern computing. PARC was bankrolled by Xerox's near-monopoly on copiers, which was enabled by Xerox's patents. PARC's decline closely tracks what happened after the 1975 consent decree in which Xerox was forced to license its patents to Japanese competitors.

2) Patents enable business models that separate design from production. ARM and MIPS, for example, design chips incorporated into designs from myriad manufacturers. How much value has been enabled by proliferation of these IP cores? You may point to things like RISC V, but that only proves the point. RISC V followed 15 years after the first ARM licenses, and has a fraction of the capital backing it. It's a lot harder to raise capital to build designs with the idea that you're going to give away the work product for free.

3) Patents enable technology sharing. Dozens of different companies have technology that is included in DVD, Blu-Ray, 2G/3G/4G, Wi-Fi, etc. Companies contribute the results of very expensive R&D efforts to these openly-published standards because they can ensure they get a cut of the value created by that technology. If they could not, there would be strong incentives to keep that technology secret instead. You might point to the success of web standards in the absence of patent protections. I'd posit that the web is the exception not the rule, and it's an exception that exists because of how easily the web can be monetized with advertising. That monetization strategy is not widely applicable.

[derf_]

Great, let's see what the fine article has to say about these things.

1) "In less than 30 years, the flow of patents more than quadrupled. By contrast, neither innovation nor research and development expenditure nor factor productivity have exhibited any particular upward trend." In other words, more patents does not appear to encourage people to splurge on fundamental research in aggregate.

But it gets worse, "The cost of litigating patents is not insubstantial either. Bessen and Meurer (2008) used stock market event studies to estimate the cost of patent litigation: they estimate that during the 1990s such costs rose substantially until, at the end of the period, they constituted nearly 14 percent of total research and development costs." So at least we've identified where some of the money being brought in from all of these monopolies is going (it isn't to the scientists and engineers).

2) It also enables business models that allow taking money from people without contributing anything at all. "On the other hand if a patentholder does not produce a marketable product and hence cannot be countersued---like Microsoft in the phone market or other patent trolls in other markets---then patents become a mechanism for sharing the profits without doing the work. In this scenario, not only do patents discourage innovation, but they are also a pure waste from a social standpoint."

3) "The downstream blocking effect of existing monopoly grants on incentives for future innovation has greatly increased in recent decades because modern products are made up of so many different components. The recent---and largely successful---efforts of Microsoft to impose a licensing fee on the large and expanding Android phone market is but one case in point. ... Microsoft is attempting to charge a licensing fee solely over a patent involving the scheduling of meetings---a rarely used feature of modern smartphones. ... Hence, the main dynamic general equilibrium effect of a patent system is to subject future inventions to a gigantic hold-up problem: with many licenses to be purchased and uncertainty about the ultimate value of the new innovation, each patent holder, in raising the price of his "component," imposes an externality on other patent holders and so charges a higher than efficient licensing fee." The externality isn't just on patent holders. Later, quoting Bill Gates: "A future start-up with no patents of its own will be forced to pay whatever price the giants choose to impose."

Having participated in these kinds of technology sharing efforts, I can assure you that the value extracted is basically unrelated to the actual value of the innovation, and mostly defined by the (current or expected) network effects of the technology in question and the political clout of its proponents in convincing other people to require its use. I.e., you're not paying for an invention, you're paying for a standard, and making standards is not something that requires external incentives.

As for monetization: "At the opposite extreme we have, again among many, the example of the Cornish steam engine discussed in Nuvolari (2004, 2006). Here engineers exchanged nonpatented ideas for decades in a collaborative effort to improve efficiency." I don't think they monetized it via advertising.

[rayiner]

> So at least we've identified where some of the money being brought in from all of these monopolies is going (it isn't to the scientists and engineers).

You're not trying to minimize litigation costs, but rather maximize R&D investment net of litigation costs. So the question is, if competitors could quickly copy the results of R&D efforts, would R&D investment be more or less than 14% lower? Also, it's not like litigation costs under those alternative regimes would be zero. At the end of the day, the free-rider problem is a real economic problem and permitting it undermines market efficiency. One can imagine alternative models for addressing it, but those frameworks will have a cost too.

> It also enables business models that allow taking money from people without contributing anything at all.

That incorrectly assumes that the only "contribution" is producing an end-user product. ARM, for example, doesn't produce end-user products. You can't go to ARM and buy Cortex A72 CPUs. When MediaTek produces an SoC integrating an ARM core, is the license fee an example of ARM simply "sharing profits without doing the work?"

> The downstream blocking effect of existing monopoly grants on incentives for future innovation has greatly increased in recent decades because modern products are made up of so many different components.

Hold-up problems are real, and there is a real question of how to properly value all the technologies that go into a modern product.

> I.e., you're not paying for an invention, you're paying for a standard, and making standards is not something that requires external incentives.

If standards don't embody important technical contributions, then why don't implementers rush to create alternative, unpatented standards? 802.11 has been out for more than two decades. Why do implementer companies continue to pay for each new generation of 802.11, instead of developing their own? If the choices truly are arbitrary, it should be trivial to avoid the relevant patents (indeed, everything in 802.11a should be out of patent by now, or close to it).

The idea that alternative monetization strategies are workable in the large scale is almost self-refuting. Patents don't preclude you from developing technology and releasing it into the public domain, so long as you get there first. But it seems like companies motivated by patent protection consistently "get there first." That is itself a validation of the incentive structure created by patents.

[dahauns]

>If standards don't embody important technical contributions, then why don't implementers rush to create alternative, unpatented standards? [..] If the choices truly are arbitrary, it should be trivial to avoid the relevant patents [..].

The by far most important aspect of those standards is not of technical nature. It's the host of agreements between the involved parties to not sue each other into oblivion. The patents involved have long ceased to hold the role of drivers of technical innovation, it's about the sheer amount of legal ammunition they can provide, and they have been created in such an image.

Lots of technical fields (esp. in IT) nowadays are a veritable minefield, scattered with a huge amount of incredibly broad and vaguely written patents, often playing mix-n-match with prior art or other kinds of dubious validity (which nevertheless have been granted - while it has gotten better, the allowance rate of the USPTO was close to 100% around the turn of the millenium...), where the attempt to navigate around any violations is a herculanean effort, and hardly possible without a veritable legal team. (And you should let them do the patent search anyway: If you dare to try it yourself and someone sues anyway - hooray for treble damages!)

[AnthonyMouse]

> The idea that alternative monetization strategies are workable in the large scale is almost self-refuting. Patents don't preclude you from developing technology and releasing it into the public domain, so long as you get there first. But it seems like companies motivated by patent protection consistently "get there first." That is itself a validation of the incentive structure created by patents.

There is a baseline level of research which will be done even without the patent system, e.g. because Verizon would rather spend fifty million dollars improving radio efficiency than an extra billion dollars in a spectrum auction. If you provide a patent system on top of that, they take the patent even if it wasn't necessary for them to do the research. That isn't proof the patent grant was the incentive for that research, only that it was the incentive to apply for the patent on it.

If you want the real numbers you need some way to distinguish those cases from the ones where the invention wouldn't occur without the patent grant.

[derf_]

>You're not trying to minimize litigation costs, but rather maximize R&D investment net of litigation costs. So the question is, if competitors could quickly copy the results of R&D efforts, would R&D investment be more or less than 14% lower?

I think you missed the part where, "during the 1990s such costs rose substantially." To give further evidence, from 2006 to 2012 the number of patent troll lawsuits increased by a factor of six [3]. But, "the US economy has seen neither a dramatic acceleration in the rate of technological progress nor a major increase in the levels of research and development expenditure." So the answer is no, all of this litigation is not encouraging R&D spending (for some reason).

> That incorrectly assumes that the only "contribution" is producing an end-user product.

Perhaps I wasn't clear. I'm not saying that ARM doesn't contribute value. I'm saying that a system that allows the separation of "design from production" also allows patent trolls, and you have to trade the benefits of one against the costs of the other. For the benefit of your one ARM example we pay the cost of 2,900 lawsuits by trolls in the year 2012 alone [3], making up 61% of all patent cases [4] (I wish I had more recent numbers).

> If standards don't embody important technical contributions, then why don't implementers rush to create alternative, unpatented standards?

You mean like <https://aomedia.org/>? They do, but I think that there are a few reasons that this doesn't happen more often:

(a) Avoiding patent thickets once they have already been created is incredibly hard work. Much harder than just developing the technology, in my opinion.

(b) It is even harder to collaborate without incurring substantial legal liability. But no such collaboration is required to create the thickets.

(c) Standards organizations often have policies which make it difficult or impossible to achieve these results, and many participants have strong incentives to prevent you from achieving them.

(d) Even if you make something "better", it is not "the standard". Displacing entrenched incumbents is incredibly hard (again, because of the network effects).

The places where you will see this happen is where there are business models that cannot support any per-unit royalty (e.g., giving away your software for free on the internet), because that provides strong incentives to make it happen.

Laptops and routers are not such an industry. They can just pass on the cost to consumers, who are not represented when these standards are set. This is the basic public goods problem.

Again quoting the article: "Notice, too, that many patent lawsuits have a public goods aspect. Consider a case in which the plaintiff is asserting that its patent has been infringed. If the plaintiff wins the lawsuit, by confirming its monopoly position it appropriates all the benefits of winning the lawsuit. A victory by the defendant, by contrast, benefits partly itself, but also other firms that might be sued by the plaintiff for patent infringement as well as consumers who would have a more competitive market. Thus, the defendant receives only a slice of the overall benefits from winning the lawsuit, and will be willing to spend less on such lawsuits than it would if it were to receive all the benefits." The parallel with getting your patent-encumbered technology into a standard vs. some other firm trying to keep it out is exactly equivalent. The correct play is for the other firm to just file their own patents, but this tragedy-of-the-commons result isn't exactly ideal.

[3] https://www.wsj.com/articles/SB10001424127887323469804578525...

[4] https://money.cnn.com/2013/07/02/technology/enterprise/paten...

[slrz]

> 2) Patents enable business models that separate design from production. ARM and MIPS, for example, design chips incorporated into designs from myriad manufacturers.

Their designs are already protected by copyright, though.

[rayiner]

That only protects against literal copying. That’s useful where the expensive part of your R&D is laying out the gates, but not if the expensive part is figuring out how the gates should be laid out to achieve particular results.

[gowld]

If that were true, then no one would file patents for 36 years, they'd just enjoy copyright protection or 150 years.

[AnthonyMouse]

> 1) Patents enable "benevolent monopolies." Companies that can afford to splurge on fundamental research because they have a revenue source protected by some sort of barrier to entry or network effect.

The value in "benevolent monopolies" isn't the revenue source. Money is fungible. If there is something worth investing in, it will attract VC money. And if a company has revenue from a monopoly, they could just as easily invest it in real estate or the S&P 500 as their own industry.

The value of a monopoly is that it excludes free riders from improvements. The best example of this was Ma Bell and Bell Labs. If you can improve the phone network, e.g. with lasers (fiber optics), or information theory (data compression), or transistors (microprocessors), then you can invest in those things and capture the benefits directly without incurring a competitive cost disadvantage, because you have no competitors.

But the AT&T monopoly wasn't due to a patent. They never expected their monopoly to expire as patents do. The patent monopoly isn't designed to be long enough to engage in this kind of behavior in general. Which is why we see this much more often in monopolists whose monopolies aren't derived primarily from patents -- AT&T, Microsoft, Google, etc.

And the other side of it is that you're excluding the whole rest of the world from making improvements. You have to buy your phone from AT&T. No modems, no iPhones, no third party ISPs or open internet. Just the original monopoly extended into everything it touches, with all the deficits that make monopolies terrible.

That this is a net-negative is the reason we have antitrust laws.

> 2) Patents enable business models that separate design from production.

The simple version of this where you have a core design but not a fab is solved by having the fab you use sign an NDA, or you can sell the secret to the implementer outright. The version where you design part of the core and someone else improves on it or you have multiple customers is really this:

> 3) Patents enable technology sharing. Dozens of different companies have technology that is included in DVD, Blu-Ray, 2G/3G/4G, Wi-Fi, etc.

The counterargument is that it's difficult to keep a lot of these things secret. And there are reasons to enter into technology sharing agreements independent of patents, like the network effects of interoperability. You want your movies to play on every customer's DVD player and your phone to work on every carrier's network.

The patented technology sharing cartels are also currently used to exclude new entrants to the market, or impose unrelated conditions like requiring all DVD player manufacturers to not let customers skip particular ads as a condition of the patent license.

The best case to be made for patents is that they prevent free riding. But that's maybe the biggest problem with the existing patent system -- independent reinvention is not free riding but is patent infringement. Which is the root of all patent trolling.