Category Archives: Information Goods

Quick, Weak Patents

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Joshua Gans writes,

Suppose that patents were granted automatically without examination — beyond some minimal review — but consequently, with less exclusionary power should the patent be at issue in legal proceedings.

How would this work? An inventor submits a patent application and, if they choose, they can receive a ‘weak’ patent immediately. Should they notice someone else commercialising their invention, they could then initiate court proceedings at which time they would need to have the patent examined which could, of course, require all of the changes and uncertainty that comes with that process. Of course, it may be that this is an obvious outcome and could actually be avoided in return for some settlement with the potential infringer of their patent.

I will grant that, taking the amount of patent filings as given, this sounds like an improvement. But I think it would greatly increase the number of patent filings. From an offensive perspective, you want to file patents on anything you can dream of, because you know you are going to get approval. From a defensive perspective, you want to file a patent much sooner than you would have otherwise, for fear of someone else getting a weak patent.

I hope this idea is thought through more carefully before it is implemented.

Paul Romer on Physics and Information

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He writes,

There is a crucial distinction between human capital (stored in neurons), and codified information (stored in some external form, such as printed text or bits on a hard drive.)

Anything stored in neurons is a rival good.

A person’s human capital is fully excludable as long as people have legal control over their own bodies. So there are no human capital “spillovers” and no human capital “externalities.”

As the cost of copying codified information goes to zero, it becomes a pure nonrival good.

Pointer from Mark Thoma. Read the whole thing. It relates to my bumper-sticker saying: Information wants to be free, but people need to get paid.

Brad DeLong on the Public Sector vs. the Private Sector

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He writes,

Now we know that as bad as market failures can be, government failures can be worse. We badly need new effective institutional forms. But the decreasing salience of “Smithian” commodities in the twenty-first century means that rational governance would expect the private-market sphere to shrink relative to the public.

Pointer from Tyler Cowen.

I think of Brad DeLong as a Jekyll-Hyde character. The bad Brad DeLong snarks and snarls. The good Brad DeLong is insightful. This post is the good Brad DeLong. Read the whole thing. I am only commenting on part of it now. I would like to comment more on his discussion of the risk premium, but I think I need to see a longer, less hurried version of it.

In the quoted passage, his point is that as the share of the economy that produces stuff decreases and the share that provides health care, education, and information increases, we will see more informational asymmetries and externalities. This might mean that we need an expansion of existing government. However, when I think of “new institutional forms,” I think of the organizations of civil society and entrepreneurs.

Recall that Tyler and Alex see informational asymmetry being conquered by the Internet and entrepreneurs who make use of it. Recall also my comments on reputation systems as regulators.

Recall also my catch-phrase: Markets fail. Use markets.

Reputation Systems as Regulators

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Tyler Cowen and Alex Tabarrok write,

In recent times, information technology has made it easier to observe a seller’s reputation and to contribute to the formation of a seller’s reputation at low cost. Yelp, Angie’s List, and Amazon Reviews all make it easy for past buyers to report their observations on seller quality and for future buyers to observe a seller’s accumulated reputation.

This might mean that we need less regulation. Other possibilities:

1. We have always had the means to use reputation systems as an alternative to regulation. But regulation is the preferred outcome of the political system, perhaps for bootleggers and baptists’ reasons. The advent of better information and technology actually does not change the relative economic and political advantages of regulation.

2. One issue with reputation systems is that there is an ongoing temptation to game them. Consider “search engine optimization” or “social media marketing.” Surely there are folks out there offering to get your business top rankings on Yelp. Given that gaming will work at least sometimes, is an unregulated equilibrium necessarily the best?

3. It becomes harder for new entrants to break into a market governed by reputation than one governed by regulation. Obtaining a license from a regulatory agency might be easier than obtaining visibility in a rating system.

Tyler Cowen vs. the Club Model

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He writes,

In the old days one heard speculation about bundling a great number of newspapers and blogs into a single-price access model, but in retrospect this probably never had much financial potential, for reasons which by now should be clear. What would an “all-you-can-eat buffet for economists” mean? And who if anyone would benefit from it?

What such a buffet would mean would be that by paying one amount per month you could read as much as you want from the NYT, WSJ, existing blogs, plus all of the new economics blogs that would emerge because bloggers would now be directly compensated by getting a share of the subscription money, perhaps in proportion to the number of views of their posts or some other metric. The beneficiaries would be readers who would read more NYT and WSJ articles if there were no paywall and readers of the new blogs that emerge.

And the biggest beneficiaries of all will be people who save time not having to click on the “close” window on all those unwanted pop-up ads!!!! Because with a bundled subscription, we can finally have content without advertising. The current newspaper model is headed toward the opposite.

This “club” might not be the most viable model. I once thought it would be, but over time I have become convinced that the patronage model will win out. That is, in the end, the NYT will be a money-losing enterprise, but some wealthy patron or patrons will be happy to keep it going. Similarly, those bloggers who want money will have to find patrons to support them. Whether content is better under a patronage model or under a club model is not clear.

Dean Baker on Drug Research

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He writes,

It is not difficult to envision alternative mechanisms to pay for the research currently being incentivized with patent monopolies. Several economists have proposed a patent buyout system, where the government would buy out patents and place them in the public domain. A simpler method, however, would be to have direct public funding. The government already spends more than $30 billion a year to finance biomedical research through the National Institutes of Health (NIH). It would probably be necessary to increase this amount by $50-$60 billion a year in order to replace the funding currently supported through patent monopolies.

This additional funding could probably best be channeled through a mechanism other than NIH, with private companies bidding for major contracts to support research in a variety of areas. By having a relatively limited number of prime contractors, who could then contract out as they please, we would avoid having a situation of the government micromanaging research. The contracts could then be renewed and/or expanded, depending on the company’s track record. The conditions of getting the funding would be both that all patents are placed in the public domain and also that all research findings are made publicly available on the Internet as soon as practical.

I agree that we should think outside of the patent box when it comes to medical research. In fact, in my essay for the growth forum, I also chose to propose an alternative to the patent system.

Matthew Yglesias on Amazon and Market Power

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He writes,

What is indisputably true is that Amazon is on track to destroy the businesses of incumbent book publishers. But the many authors and intellectuals who’ve been convinced that their interests — or the interests of literary culture writ large — are identical with those of the publishers are simply mistaken.

Pointer from Jason Collins.

I agree that we should not be rushing to the barricades to defend the traditional publishing business model. Rooting for the book publishers to have strong negotiating leverage with Amazon is equivalent to rooting for the legacy music industry to have strong negotiating leverage with iTunes.

Jean Tirole and Josh Lerner on Open Source

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They wrote,

Open source and academia have many parallels. The most obvious parallel relates to motivation. As in open source, the direct financial returns from writing academic articles are typically nonexistent, but career concerns and the desire for peer recognition provide powerful inducements

They wrote this almost ten years ago. I bring it up because of Tirole’s Nobel Prize, announced yesterday.

Tirole and Lerner noted, with a bit of puzzlement that, compared with open-source software writers, academics were less likely to make their data sources public and more likely to allow their work to be hidden behind publishers’ paywalls. I think that in those ten years there has been a shift, at least in economics, more in the direction of the open-source model.

Patent Pools

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Josh Lerner and Jean Tirole (the latter was just awarded a Nobel Prize) write,

Innovations in hardware, software or biotechnology often build on a number of other innovations owned by a diverse set of owners.

Pointer from Joshua Gans. For more on Tirole, see Tyler Cowen and subsequent posts by Alex and Tyler.

Two (or more) firms may hold complementary patents. That is, the value of using firm A’s patented innovation is higher to a licensee who can also use firm B’s patented innovation. Lerner and Tirole ask when a social planner would want these firms to pool their patents, that is to license them together. If you do not care to follow their mathematical analysis, you can skip to the end where they summarize their conclusions.

The situation is a form of the dual-monopoly problem. As I once explained,

suppose that a single company has a monopoly in both peanut butter and jelly. When it sets the price of jelly, it knows that the more jelly it sells the more peanut butter it will sell. Therefore, at the margin, it will tend to want to set a lower price for jelly than if it were just looking at jelly as a stand-alone product.

If you then break up the PB and J monopoly into two separate companies, the incentives of the two separate monopolies will change. The peanut butter company is not going to worry about the fact that higher peanut butter prices will reduce jelly consumption, and the jelly company is not going to worry about the fact that higher jelly prices will reduce peanut butter consumption. The net result of the breakup is that prices to consumers will rise.

This theory goes all the way back to Cournot.

It seems to me that we observe patent pools more often internally than externally. Think of Apple Computer as one gigantic internal patent pool. Or a large pharmaceutical company. It might be easier for one firm to internalize complementary patents than for several firms to get together and pool them.

Spectrum Price Discrimination Using Zero-rated Apps

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The Washington Post reports,

Apps and Web sites that don’t count against the users’ data plan are popping up both in the United States and abroad, often under names like Wikipedia Zero or Facebook Zero.

Pointer from Tyler Cowen.

If what wireless companies need is congestion-pricing or peak-load pricing, then my prediction would be that we will not see zero-rated apps that allow video anywhere, any time. To get that, you will have to pay something.

There is now a vocal “net neutrality” chorus that will fight any form of price discrimination in wireless services, including fighting zero-rated apps. I think that they are misguided and represent no actual consumers. However, the FCC will do everything to make them seem important, because that in turn justifies having the FCC do more regulatory meddling.