Against Intellectual Monopoly

date.
    The photograph of their "render farm" - a computer stuck in the corner of a rather
small apartment kitchen gives the flavor of the production cost.
    37. Boldrin and Levine (2005b).
    38. Varian (1997), p. 1.
    39. Karjala (1998), p. 9. On availability of products in the public domain, see also Karjala
(2004) and our own analysis earlier in this book.
    40. Landes and Posner (2003), p. 223.
    41. Landes and Posner (2002), p. 15. A similar argument is developed, almost verbatim,
also in Landes and Posner (2003), pp. 487-8.
    42. Landes and Posner (2002), p. 15.
    43. Bill Britt, "International Marketing: Disney's Global Goals," Marketing, May 17,
1990, as quoted in Landes and Posner (2002), p. 13. Also in Landes and Posner
(2003), p. 224.
    44. Landes and Posner (2003), p. 225. A similar statement is in Landes and Posner
(2002), p. 15.
    45. Landes and Posner (2003), p. 229.

     

EIGHT
Does Intellectual Monopoly
Increase Innovation?
    What we have argued so far may not sound altogether incredible to the
alert observer of the economics of innovation. Theory aside, what have we
shown, after all? That thriving innovation has been and still is commonplace in the absence of intellectual monopoly and that intellectual monopoly
leads to substantial and well-documented reductions in economic freedom
and general prosperity. However, while expounding the theory of competitive innovation, we also recognized that, under perfect competition, some
socially desirable innovations would not be produced because the indivisibility involved with introducing the first copy or implementation of the new
idea is too large, relative to the size of the underlying market. When this
is the case, monopoly power may generate the necessary incentive for the
putative innovator to introduce socially valuable goods. And the value for
society of these goods could dwarf the social losses we have documented. In
fact, were standard theory correct, so that most innovators gave up innovating in a world without intellectual property, the gains from patents and
copyright would certainly dwarf those losses. Alas, as we noted, standard
theory is not even internally coherent, and its predictions are flatly violated
by the facts reported in Chapters 2 and 3.
    Nevertheless, when in the previous chapter we argued against all kinds
of theoretical reasons brought forward to justify intellectual monopoly on
scientific grounds, we carefully avoided stating that it is never the case the
fixed cost of innovation is too large to be paid for by competitive rents. We
did not argue it as a matter of theory because, as a matter of theory, fixed
costs can be so large as to prevent almost anything from being invented.
So, by our own admission, it is a theoretical possibility that intellectual
monopoly could, at the end of the day, be better than competition. But does
intellectual monopoly actually lead to greater innovation than competition?

    From a theoretical point of view the answer is murky. In the long run,
intellectual monopoly provides increased revenues to those that innovate,
but it also makes innovation more costly. Innovations generally build on
existing innovations. Although each individual innovator may earn more
revenue from innovating if he has an intellectual monopoly, he also faces
a higher cost of innovating: he must pay off all those other monopolists
owning rights to existing innovations. Indeed, in the extreme case when
each new innovation requires the use of lots of previous ideas, the presence
of intellectual monopoly may bring innovation to a screeching halt.'
    Additionally, intellectual monopoly provides the incumbent with a dominant position that discourages competitors from entering, thereby reducing
the incentive for the incumbent to innovate to keep ahead. In part, this is
because innovations build on existing innovations; hence, the monopolist
can use high prices to make new innovations too expensive for competitors.
In part, this is because monopolists generally face lower costs of "matching"
whatever improved new product entrants may come up with. Notice that,
in both cases, it is the discouragement effect that matters: this implies less
effective contestability, and hence less innovative effort.
    Further, theoretical considerations also suggest that the response of innovation to the strengthening of intellectual monopoly is not uniform over
time. In the short run - for example, immediately after the