From October 2016 to March 2017 the team is joined by Guest Kats Rosie Burbidge and Eibhlin Vardy, and by InternKats Verónica Rodríguez Arguijo, Tian Lu and Hayleigh Bosher.

Friday, 24 April 2015

The case against patents: what does first-mover advantage tell us?

For Kat readers who may not be aware, for more than a decade a professional literature has developed that is challenging the justification for maintaining a patent system, at least in its current form. Perhaps the most notable scholars engaged in this endeavor are Professors Michele Boldrin and David K. Levine, both of the Washington University in St. Louis. The long form of their arguments is set out in their 2008 book, Against Intellectual Monopoly. Various short forms of the positon are scattered across numerous articles. The arguments made by Boldrin and Levine have engendered much commentary, both pro and con. As a window to their position, let us consider their 2013 article, "The Case against Patents", published in the Journal of Economic Perspectives, and their arguments why first-mover advantage is often preferable to patent protection as a competition strategy. First-mover advantage refers to a person who is the first entrant into a product market and where, in addition to being the first to enter, enjoys advantages in the technology involved, preferred access to key resources (such as information or a supply chain) and a barrier to entry in the form of high switching costs for others that might wish to compete. Here is what Boldrin and Levine have to say about first-mover advantage:
"In most industries, the first-mover advantage and the competitive rents it induces are substantial without patents. The smartphone industry—laden as it is with patent litigation—is a case in point. Apple derived enormous profits in this market before it faced any substantial competition….While it is hard to prove this delayed imitation also would have occurred in the absence of patents, intuition suggests—and our formal model in Boldrin and Levine predicts—that there is little reason to assert patent rights while the first-mover advantage is still active. Apple did not initially try to use patents to prevent the Android phones from coming into its market and the subsequent 'patents fight' has been taking pace largely after 2010; these facts are consistent with a substantial first-mover advantage."
This Kat notes that there is a certain frustration in considering these observations since they are not supported by any footnotes (references are set out in alphabetical order at the end of the paper). In light of that limitation, this Kat would make the following observations:
1. Relying on anecdotal information regarding the ultimate hi-tech success story is a far from convincing way to prove the robustness of the proposition across industries. Apple's competitive advantage is also due to the so-called hardware-software-applications ecosystem supporting the iPhone, some of which was anchored in patent protection, as well as the strength of the Apple brand. There is very little that enables the reader to choose between the Apple anecdote as the exception that proves the rule, the rule that proves the exception, or the exception that proves the exception.

2. First-mover advantage is related to the issue of patent versus trade secret protection. Sometimes first-move advantage is "chosen" because the person has no reasonable patent option, sometimes it is chosen because of patent costs, sometimes it is chosen in the belief that early market entry and market share and branding can be successful. At the very least, the authors would have been well advised to consider the various patent/trade secret decision trees.

3. The authors state that, since it is hard to prove that patents did not matter as long as Apple enjoyed first-mover advantage, they will rely on their intuition and their earlier model. This will not do. If the proposition is "hard to prove", then it seems to this Kat that the researchers should resist publishing conclusions until they have found a way to do so. Relying on intuition and a formal model does little to provide the level of empirical support that seems necessary to promote the position.
As for more quantitative support, they refer to a 2000 study by Cohen, Nelson and Walsh, "Protecting Their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms (or Not)", NBER Working Paper 7552. They report:
"Here, over 50 percent of [R&D] managers indicate lead time (first-mover advantage) is important to earning a return on innovation; outside the pharmaceutical and medical instruments industry, less than 35% of managers indicate that patents are important."
Here, as well, this Kat has several comments:
1. There is no indication of the relative degree of success between companies that prefer first mover-advantage to those who do not. Perhaps patents are correlated with over-sized profits; perhaps they are not (and vice versa); we are not told.

2. The two prongs summarizing the findings are not entirely clear. Saying that first-mover advantage is important for earning a return on innovation does not exclude patents as an important factor as well, while concluding that patents "are not important" is an exclusionary assertion. As it stands, the two parts need to be reconciled to understand the ultimate thrust of the research results.
The authors, in their customary fashion, take substantial and broad-stroke swipes at the patent system. Their arguments are worthy of attention. As such, they owe readers a clearer and more detailed exposition.

17 comments:

Anonymous said...

Unless I'm missing something, there's no reason not to employ both strategies. A decent attorney can get an application on file qucikly enough to cause no appreciable delay in your "first mover" strategy (unless you're advertising a feature but haven't nailed down the implementation yet, at which point the advertisement is probably not an enabling disclosure). The first mover advantage is only going to help for so long, and probably not for the 20 years of protection you get from the patents.

Of course, in some very fast moving fields, where the patented technology will be totally obsolete before the first mover advantage fades, there may be some argument for this.

Anonymous said...

My first thought is that 'first-mover advantage' is all very well if we are talking about large companies with the resources to bring a product to market quickly and promote it aggressively. Without such resources how does a smaller fish, in the absence of any patent protection, derive any benefit from its innovation?

Anonymous said...

Indeed, patents aren't there to let companies win despite not being first movers. They are there to let the first mover get on with it, without being swamped by copyists. This provides investment incentive to be the first mover.

Often you can't tell whether a patent has helped or not. Take Google's first patent, for PageRank. Was it the most valuable patent in history? Did it delay competitors for the (short) period of time required for Google to get liftoff or was it irrelevant - did they just get somewhere through first mover advantage? We will never know - it only requires there to be one or two legal opinions not to copy PageRank to be languishing in filing cabinets somewhere for it to have made all the difference.

Bart van Wezenbeek said...

I do not know whether this would be the same in each and every technical field and/or in each and every business case, but being a first mover with patent protection to my opinion certainly would be advantageous over being a first mover without patent protection.
Having patent protection does not Always lead to patent litigation (caused by competitors or the infringement of competitors) but patent protection certainly will affect product development with the competitors since they have to decide whether or not a work-around can be established and at which price and whether or not such a work-around would weigh against getting a license or pay damages upon infringement.

Anonymous said...

A possible reason for Apple not initially trying to use patent rights is that they had not yet been granted!

MaxDrei said...

Broad swipes at the patent system? Well, when the patent system of a particular jurisdiction is dysfunctional, no wonder there are swipes at it. But let's not take it as a swipe against patent rights per se.

Any patent system is a restraint of trade which must be strictly circumscribed, so it does its job, promoting the progress of useful arts, as opposed to impeding that progress.

Those who benefit from any dysfunction in the US patent system assert that America is great precisely because of the way its patent system functions. Those harmed by its patent system say that American innovation has occurred despite its dysfunctional patent system. Between these two sides, there is plenty of room for academics to publish, and make their names, even if what they have to say doesn't stand up to dispassionate and informed scrutiny. The Davos crowd, the movers and international shakers, the people on the top floor and in first class or in private jets, will of course lap it up regardless, and make the name of the publishing academic.

Anonymous said...

"Apple did not initially try to use patents"

Pardon my French, but what a load of utter bollocks. When presenting the iPhone in 2007, Steve Jobs famously said "Boy have we patented it.". Such a clear threat of litigation certainly counts as "using" patents to dissuade competitors. Not to mention that litigation against Android started already three years later, years during which there were certainly plenty of confidential exchanges and cease and desist letters between Apple and its competitors.

Choosing this particular case is remarkably disingeneous on Boldrin and Levine's side.

Anonymous said...

Whether or not these arguments have any merit, it's very difficult to use Apple as an example here as the company is an outlier in so many ways.

Anonymous said...

In working paper 2012-035A, Boldrin and Levine spark of the Wright Brothers' modest improvement in existing flight technology. But for the patent, Curtiss would have walked over the first mover advantage. Separately, Lipitor was the third statin; no first mover advantage, even in the drug biz.

Lawrence Ebert
IPBiz

Bojan Pretnar said...

I developed a theoretical microeconomic model in which I show that patents are wrongly considered as monopolies, and that they could actually be interpreted in a competitive way.

A link to the article appears below.

By the way, the article appeared also in German translation in Sept. 2004 in GRUR Int.

Before being published, I got supportive opinions of two noted US economists, K. Maskus, and W. Baumol. However, I was also friendly warned that I cannot expect to see my article being published in any of major Us economic journals, because in article I am criticising two US ecnomists awarded with Nobel prize (Arrow and Stiglitz). So, it was then published in legally oriented journals.

In addition, let me mention that a theoretically simplified (in terms of economic theory) version of the attached article, but on the other hand a bit extended with some business-oriented arguments was published as Ch. 11 in the book IP-Manager (Ed. A. Wurzel), Carl Heymanns Verlag 2009.

Article: https://docs.google.com/viewer?a=v&pid=sites&srcid=ZGVmYXVsdGRvbWFpbnxpcGZpbmFuY2V3ZWJsb2d8Z3g6N2M4NTQ4NDE3ODkzOTk5OQ

Lin said...

Some of the comments here are entirely dismissive of the first mover advantage, which is not giving it justice. Anecdotes or statements from individuals also do not appear to do so.

However, some good questions emerged.

As it relates to the question of small companies, well, there are a number of responses:
(a) small companies could always team up with bigger companies to implement their inventions
(b) small companies could prepare more for market launch (and, indeed, start their preparation earlier, while still developing)
(c) much innovation does not come from small underfunded companies anyhow (that's not how innovation works in many fields)

Then somebody said: why not rely on both?
Well, because granting both may well be excessive (patents are very intrusive to innovation), especially if one is enough.



I think the point with the first mover advantage is that companies would have to work harder to make use of it than they currently have to work when patents exist. However, at some point, the question can be framed as, which do we prepare:
(a) do we want to bear the intrusive effects and the upkeep costs keep of the patent system
(b) do we want to have corporations work harder to make better use of their first mover advantage.

Choosing between those two, it may seem that (b) may be preferable at least in some situations. If (b) is such a huge burden on companies, there are a number of possibilities:
(a) maybe they deserve that burden in the first place, because they operate under conditions of competition
(b) even if not, maybe having companies bear this burden is a good way to pick out companies with effective management (thus, also likely, lower production costs and more competitive benefits offered to the consumers in the long run)
(c) even if that seems not to convince, maybe the state could, instead of using immense amounts of monetary resources to keep the patent system going, could use some of those resources to help companies make better use of their first mover advantage?



These are all things worth considering, and I think dismissing them outright (as some commentators did) is hasty, to say the least.

THE US anon said...

Lin,

Your advise is lost in the obvious bias against patents that you exhibit.

There is a phrase in equity that would be worth remembering here: come to the table with clean hands.

When you come to this table with such obvious bias, the points that you want to make will simply not have the effect that they might (or even should). You seem to want to dismiss "Anecdotes or statements from individuals" and yet, that is ALL that you yourself offer.

An offer in error, I might add.

Teaming up with big companies without leverage of patents is problematic at best. See i4i v Microsoft.

You speak of "prepare more" as if time and money are unlimited - this strikes me as you lacking real world experience.

You indicate that "much innovation" does not come from small "underfunded" companies - which is rather nebulous and also obfuscatory as to the real world situation that MOST new jobs and MOST non-incremental and disruptive innovation does IN FACT come from small companies - the very opposite take-away from your comment. See the works of Schumpeter, Christensen, in contrast to Henderson-Clark, and the work of Trott and Berkun.

Further, the reaction against Boldrin and Levine comes in no small part BECAUSE Boldrin and Levine's views have been debunked and shown for what they are: anti-patent propaganda.

Further still, to MaxDrei, your post smacks of being disingenuous, as your name is associated with a CLAIMING that a certain jurisdiction is dysfunctional, and to then, here, use your own claims to bootstrap your views (again) AND to borrow the phrase from my jurisdiction, while you have NEVER posted showing an understanding of the phrase is more than a bit self-serving.

Standing up to informed scrutiny (dispassionate, passionate, or otherwise), it is your views that repeatedly do NOT.

Your post here makes it seem that those who claim America leads the world in innovation cannot base that lead on anything that you would intimate as being "dysfunctional," and unstated here (but not elsewhere) is that anything non-EP is necessarily "dysfunctional."

No thanks.

Anonymous said...

(a) small companies could always team up with bigger companies to implement their inventions
And how do you prevent the big company from walking away with your idea? You can try with an NDA, but why would a big company sign one before even seeing the idea (you'll need to have an impressive reputation before they are willing to do that). Or you can simply apply for a patent first.

(b) small companies could prepare more for market launch (and, indeed, start their preparation earlier, while still developing)
They'll need money first, so they'll have to persuade investors. More or less the same problem as above, except that investors might be more willing to sign an NDA. But with a patent application pending no need to be secretive and the inventor can profit from free market principles.

(c) much innovation does not come from small underfunded companies anyhow (that's not how innovation works in many fields)
True, as you said this was about small companies.

Most technological innovation is incremental and can in no way profit from any "first-mover advantage".

I think the point with the first mover advantage is that companies would have to work harder to make use of it than they currently have to work when patents exist.
Companies would not have to work harder at all. They could just sit back and wait for some bright soul to come up with an idea, then take that idea and profit from it. Those companies that continued to spend money on incremental innovation would have a competitive disadvantage and eventually eliminate themselves from the market.

(c) even if that seems not to convince, maybe the state could, instead of using immense amounts of monetary resources to keep the patent system going, could use some of those resources to help companies make better use of their first mover advantage?
What are you talking about? Patent offices are typically self-funding and the EPO for one contributes to the finances of its member states.

Apart from that, how could states possibly help companies make better use of a first-mover advantage? By showing how one should run a company? I don't think so. Or by somehow legally protecting that first-mover advantage...?

Lin said...

(a and b) And how do you prevent the big company/investors from walking away with your idea?

Is that really such a huge problem? I don't see any problem with requiring NDAs, or disclosing to them the idea in small bits, or offering co-operation in terms which advantage them so as to make it difficult for them to walk away, or publicising certain elements of your idea so that if another company steals it they get a lot of negative publicity, or teaming up only with companies you have researched well and trust, etc, etc.. This is certainly not an insuperable obstacle, and, given a market need for this, other private measures of maintaining privacy vis-a-vis another companies could develop.


(c) Right, so it seems we both agree small companies are not likely to be extremely big innovators. The concern behind the claim above (quote: "'first-mover advantage' is all very well if we are talking about large companies with the resources to bring a product to market quickly and promote it aggressively") is then mitigated substantially, since it seems that big companies don't need patents and can use the first mover advantage, while small firms are not likely to innovate that much anyhow (and where they do, they can usually team up with small companies, as I have suggested).


(d) Most technological innovation is incremental and can in no way profit from any "first-mover advantage".

This is an interesting claim, but it's not clear if it's empirically true, and it's not clear to what extent its second part ('it can in no way profit') is true, especially if you interpret 'first mover advantage' broadly. It seems you can always benefit from useful innovation if you duly prepare for it.


(e) Companies would not have to work harder at all. They could just sit back and wait for some bright soul to come up with an idea, then take that idea and profit from it.

Four responses to that:
first) Such behaviour is risky, as it would entail a huge risk of entirely missing out on large new market opportunities.

second) It works the other way too: companies are now less likely to innovate, as its costs excessively to obtain all the necessary patents, risk patent infringement, etc. (and these costs disproportionately affect small companies, which you seemed to be so concerned about)

third) Moreover, it has more anti-competitive ramifications: a company who holds a patent to new slightly more efficient technology has a reduced incentive to develop that technology, compete or to improve its technology, reduce its costs or price, etc., as it can simply sue everybody else for patent infringement.

fourth) I think you will admit that some of these statements lack empirical evidence (e.g. 'Those companies that continued to spend money on incremental innovation would have a competitive disadvantage and eventually eliminate themselves from the market.') just as much as mine do (but, arguably, you need to provide much more of such evidence, as you are trying to justify something (i.e. the patent system as it currently is).


(f) What are you talking about? Patent offices are typically self-funding and the EPO for one contributes to the finances of its member states.

Oh no, all the litigation, innovation that does not occur (see above), legislation, policing costs associated with patents may have major effects on the economy, which also partially results in foregone revenue for states. To answer the 'how' question: well, it depends, and there are many ways: by creating a legal framework for NDAs (which seemed to be your concern), by helping innovators team up with people capable of capitalising on the first mover advantage of those ideas, by encouraging the inter-institutional spread of ideas, etc.

Anonymous said...

Well it is 100% TOSH. I wouldn't waste the effort reporting it.

Anonymous said...

There is considerable academic literature (see seminal paper from David Teece circa '86) that indicates being a first mover is often a disadvantage, and innovation followers can often reap the benefits and see the profits from innovation - that is even despite patent positions held by the first mover.

THE US anon said...

Excellent post, Anonymous @ 13:45.

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