Economics and Patents - Macroeconomic Perspective

Macroeconomic Perspective

The patent system has an impact on the economy as a whole. The benefits of new results, once the research is publicly known, are available to the whole economy in the relevant field, thereby bringing advantages to all parties in that field, though reducing the direct return to the party performing the pioneering research. This reduces economic incentive for a party to conduct research and innovate.

The effects of patents on a given market may vary widely according to the type of market, and whether there are other barriers to entry (e.g., business methods versus regulated medications).

Even in socialist monopole economies, the adherence to international patent laws was or becomes strict, as the effect is reciprocal for public economy, as soon as the level of technology development in these economies creates comparable advantage.

However, since patents essentially encourage innovation by giving owners the right to monopolize the market for a limited time, the public will suffer from the patents that are not innovative by paying a supracompetitive cost.

Another dilemma regarding the patent system’s effectiveness is that if the validity and scope were unclear at the issuance, it will always be corrected because other competitors will cause the case to the court and then we could either reevaluate the scope through discussion or invalidate the patent for public good. However, studies of the USPTO data showed that only very few patents are litigated to trial.

Farrell and Merges (2004) pointed out that two reasons have kept individual firms accused of patent infringement from challenging the patents holders. The first one is the public good problem, which means that once the patent is nullified, the competitors of the accused firm will benefit from the outcome. The other reason is the pass-through of the uniform royalty costs in the form of higher prices.