The Economics of Patents

Patents are perhaps the most important legal instruments for protecting intellectual property rights (IPRs). A patent confers to an inventor the sole right to exclude others from economically exploiting the innovation for a limited time (20 years from the date of filing). To be patentable, an innovation must be novel in the sense of not constituting part of the prior art or more generally of not being already in the public domain. A patentable innovation also must involve an inventive step, meaning that it must be non-obvious to a person with ordinary skills in the particular field of application. The innovation also must be useful to be patentable; that is, it must permit the solution of a particular problem in at least one application. A major element of a patent application is disclosure: the invention must be described in sufficient detail to enable those skilled in the particular field to practise it. The patent application also lays out specific claims as to the scope of the patent itself. The traditional statutory scope of patents, encompassing machines, industrial processes, composition of matter and articles of manufacture, excluded important kinds of scientific discoveries such as laws of nature, natural phenomena and abstract ideas. However, recent developments in the use of patents for computer software, information technology and biotechnology innovations are challenging a reductive interpretation of such exclusions. See Merges (1997) for further details and a comprehensive treatment of US patent law. Given that private property is inherently associated with the freedom of choice that constitutes the cornerstone of market economies (Barzel, 1989), it may seem obvious that intangible assets associated 3