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.