Against Intellectual Monopoly
size cannot arise,
just that it is far from being the only possible case. Determining which one
is more frequent in the real world is an empirical problem, not a theoretical
one. The theory of competitive innovation admits both the case in which
the minimum size is small and the indivisibility irrelevant and the case in
which it is relevant.
Is indivisibility a relevant practical problem? As we have already seen and
as we shall see even more, available evidence suggests that it is not. Notice
that, as a matter of both theory and facts, when the economy expands in
size, the economic relevance of indivisibility is progressively reduced - so,
too, as people become richer over time. Hence, economic progress makes
competitive innovations easier and easier, and the economic justification for
intellectual monopoly diminishes as time passes and the economy grows.
The Collaborative Advantage
Large advances are generally built out of many small innovations. The process of innovation is greatly enhanced when innovators share information,
enabling other innovators to bootstrap off of their advances. Because under
competition all competitors can imitate, and so benefit from the innovation of everyone else, the incentive to share information is strong. By
sharing information, the innovator increases the chances that her competitors will make further innovations - and under competition the original
innovator expects to benefit from the innovation she induces from her
colleagues.7
The incentive to share information is especially strong in the early stages
of an industry, when innovation is fast and furious. In these early stages,
capacity constraints are binding, so cost reductions of competitors do not
lower industry prices, as the latter are completely determined by the willingness of consumers to pay for a novel and scarce good. So the innovator
correctly figures that by sharing his innovation he loses nothing but may
benefit from one of his competitors leapfrogging his technology and lowering his own cost. The economic gains from lowering his own cost, or
improving his own product, when capacity constraints are binding, are so
large that they easily dwarf the gains from monopoly pricing. It is only when
an industry is mature, cost-reducing or quality-improving innovations are harder to bring about, and productive capacity is no longer a constraint
on demand that monopoly profits become relevant. In a nutshell, this
is why firms in young, creative, and dynamic industries seldom rely on
patents and copyrights, whereas those belonging to stagnant, inefficient, and
obsolete industries desperately lobby for all kinds of intellectual property
protections.
The collaborative advantage argument is often countered with the
following:
Suppose one firm chooses not to spend anything on innovation. It gets the same
amount of progress... as the other firms that do spend on innovation. Hence it
gives its stockholders a higher return. Rational stockholders accordingly do their
diversification across industries, but specialize in just that firm within the industry.
Or, if you prefer, a rational takeover artist gets control of one of the firms acting
as ... described, cuts its R&D budget to zero, increases its profits, sees its stock rise,
and makes a killing when he sells.8
The problem is that those who do not bother to spend on research and
development (R&D) do not get "the same amount of progress ... as the
other firms that do spend on innovation." Those who are part of the collaboration benefit - bystanders do not. How much has your knowledge of
writing a computer operating system benefited from all the hard work by
the Linux kernel programmers? To obtain and use the "free" information
contained in the other firms' R&D, you had better carry out R&D on your
own. If you do not, you are unlikely to be able to understand and process
the technical information that the rest of the industry is producing. So, too,
the other industry players will probably not rush to aid you in your lack of
understanding.
The First-Mover Advantage
Competitive rents are the least amount that an innovator can expect to earn
in conditions of competition. Because the innovator initially is the only one
to know the idea, there are many ways to profit from this first-mover advantage. As remarkable as the phenomenon of economists who believe that ideas
are transmitted freely, while writing a voluminous literature on
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