Intellectual property rights and incentives

Although there are only four types of intellectual property right, in practice there are as many variants as there are nations that recognize them.¹¹ Some of the distinctions are minor, while others reflect differences in the underlying regulatory frameworks.

Further diminishing the diversity are the effects of regulatory dynamics impressed at an international level by the TRIPS agreement (the Agreement on Trade-Related Aspects of Intellectual Property Rights), defined and rati­fied by the World Trade Organization (1994), and which essentially seeks to bring about a gradual international unification of the doctrine for enforce­ment of intellectual property rights.¹² The various types of intellectual property rights are instead differentiated according to the type of information that is protected (the so-called ‘subject matter’), the attribution criteria, the type of exclusive right granted to the owner (in terms of its structure and duration) and the incentive conferred.¹³

Patents generally protect ideas relating to the technological and scientific spheres (that is, new products or novel production processes) and grant the inventor/discoverer - or his/her employer - an exclusive right of limited duration (which varies from country to country) as a reward for shouldering the risk and investments connected with the research and development of the new idea.¹⁴

Transferring original ownership of the patent from the inventor to the employer - who becomes for all intents and purposes the inventor - should not, at least in theory, undermine the incentive mechanism, because it fulfils the criterion of risk transfer: the company agrees to take on the risk, and is thus entitled to benefit from the success of the venture, while the inventor receives a guaranteed remuneration in return.

Because a patent application procedure requires revealing the invention, the institution of patents also creates an incentive to disclose new informa­tion. This twofold character of the resultant incentive - to create and to disclose - does not, however, have strong implications for the economic analysis, because in this case undisclosed information will not permit exploi­tation of a legal monopoly, and hence provides no incentive to create. In consequence, any profits deriving from exploitation of the exclusive right necessarily entail disclosure of the patented idea, and hence an equivalence between the two incentives.

The granting of a patent is not automatic, but subject to fulfilment of three criteria: the criterion of novelty, which calls for a substantial advance with respect to preceding inventions, the criterion of non-obviousness, which re­quires that the advance should not be trivial and, finally, the criterion of utility, which requires the invention to have some application and therefore not to be an end in itself. Complying with these criteria should ensure that strong exclusive rights are granted only to those ideas that effectively consti­tute a real technical or scientific advance.

Copyright-authors' rights, on the other hand, protect expressions of ideas, that is, information fixed in any tangible medium such as books, CDs, films, software and the like.¹⁵ They are granted based on a criterion of minimal originality, meaning that the new expressions of ideas need only be margin­ally different from pre-existing ones.¹⁶ In reality, there is no verification procedure involved in the granting of copyright, and it is plagiarized authors who must contest the damage caused by some other, insufficiently original, expression of idea.

Moreover, because fixing of a copyright-protected idea in a tangible me­dium is in a sense instrumental to the consumption of individual units, while the information contained therein remains fluid and easily duplicated, copy­right includes provision for a bundle of rights that also regulate its reproduction and dissemination.¹⁷ We can therefore say that if technology somehow makes it possible to package information (Thomas Edison eloquently dubbed the phonograph, his invention for recording and playing back sound, ‘canned sound’¹⁸), converting it into private unit goods that can be exchanged on the market like traditional goods, copyright provides the legal glue for ‘sealing the can’ created by technology, and preventing undue appropriation.

Copyright is thus an exclusive right, granted to the author as an incentive to create, in agreement with the premises of the Benthamian paradigm. It should in theory have limited duration, to permit the subsequent enrichment of public knowledge. In practice, though, following various amendments considerably strengthening the right (with the US Copyright Term Extension Act 1998 it can last up to 70 years post mortem autoris, or 95 years in the case of a company owning the right, while the European Duration Directive 93/98/EEC has extended protection to 70 years post mortem autoris) its duration has become virtually infinite, at least for the purposes of economic analysis.¹⁹ It is this last-mentioned aspect that raises some serious questions concerning the global efficiency of the right (Antill and Coles, 1996; Lessig, 2001).

The incentive of copyright stimulates the creation of new expressions of ideas, by guaranteeing to the owner, who is generally the author (in the US case of work made for hire, as in the case of patents, the company that takes it on can be considered to be the author), exclusive rights over the economic exploitation of the intellectual property in all its forms, both direct and indirect.

Trade secrets similarly seek to stimulate the creativity of individuals by guaranteeing rights of secrecy to those who produce certain forms of infor­mation, generally pertaining to production processes (for example, the formula for a particular soft drink, a customer list and so on).²⁰ In fact such informa­tion, once disclosed, can easily be appropriated and imitated by competitors, thereby reducing the incentive for the creator to invest resources in its devel­opment, if he/she will be unable to profit from it later.

Some authors do not concur in assigning to trade secrets the attributes of property, for the reason that a trade secret is not necessarily exclusive, with nothing preventing several individuals from unwittingly owning the same secret.²¹ For the purposes of this discussion, though, this observation can be set aside because a trade secret is still based on the same rationale as all other intellectual property rights: granting a private benefit to the owner of a given information good, in order to create an incentive for its production. The fact that such a right may (unwittingly) be shared by two or more individuals does not compromise the logic of the system, and constitutes at worst an imperfec­tion.²² In any case, the economic behaviours of the owners are decided independently, irrespective of the possible existence of co-owners, and hence as if they effectively had exclusive rights over that particular information.

A trade secret has the function of conferring a competitive advantage to the owner in exchange for the creation of new information. Hence, the prospec­tive existence of two or more co-owners will in the worst case cancel out the advantage, with some interesting pro-competitive side-effects, for example by fostering price competition. The only downside to this eventuality is that two separate individuals are given an incentive to invent the same informa­tion, with the attendant duplication of expense. However, this actually happens much more often in the realm of patents, where the problem is solved by a questionable ex post attribution that does not avoid the ex ante allocation inefficiency.²³ It should nevertheless be emphasized that such situations are the exception, and not the rule.

The overall balance of welfare resulting from trade secrets is somewhat more uncertain than for other intellectual property rights, because the right can endure up to the time when, for whatever reason, the information is disclosed and enters the public domain.

Finally, on top of the social costs arising from exercise of the right, we must also factor into the welfare balance the costs incurred in keeping the information secret. But these costs are also the key to solving the dilemma of duration: precisely because secrets are difficult and expensive to keep, it can generally be expected that the information will sooner or later be publicly disclosed (Friedman et al., 1991).

Finally, trademark is an exclusive right that likewise seeks to foster the creation of new information. However the information in question is, at least in the first instance, only an accessory to goods of other markets. Trademark generally serves to convey information about the quality of products and the reputation of manufacturers, for the benefit of consumers (Landes and Posner, 1987).

However, some authors have recently put forward the thesis that trademark creation might be an economic end in its own right, serving to confer on the owner reputation inertia - and therefore market power - that is extensible and transferable to other markets, as in the case of ‘brand extension and brand stretching’ (Choi, 1998; Pepall and Richards, 2002), and that a trademark might even constitute an independent asset (Tadelis, 1999) or a well-defined symbolic good for which consumers exhibit a specific willingness to pay.

By carrying a certain amount of information about a product, a trademark effectively enables a product to be differentiated from its competitors, and ultimately gives the owner some degree of market power, which increases in direct proportion with the impact that the brand itself has on consumers.²⁴ So trademark has the additional, secondary effect of altering the quality per­ceived by consumers, who may consider equivalent products to be different solely because they are marketed under different brand names. This naturally has the effect of altering their willingness to pay and hence the balance of welfare.

From the attribution standpoint, because the public goal of trademarks is to facilitate exchanges by giving consumers more information about the goods that they are purchasing, trademark law does not generally admit appropria­tion of words or symbols denoting specific categories of objects (for example, a car maker will not be allowed to use the term ‘car’ as a trademark, whereas a manufacturer of garments and fashion accessories can use the word ‘die­sel’). Accordingly, continued protection is denied to trademarks which, for a variety of reasons, have entered into the common language and come to denote generic product categories (as in the celebrated cases of frigidaire, typewriter, elevator, aspirin, nylon, kerosene, yo-yo and so on, all originally brand names).