Sunday, 28 October 2012

Patents and price setting

A conversation with my pastor got me thinking about how we treat patents. He is more socialist minded than I. In defence of his position he used a patented medical product as an example of what he considered excessive markup within the market. The problem as he saw it was that people would mortgage their homes to purchase medications if it would potentially cure them, or stave off death for some time.

Now one could argue for the market based on the fact that the company has invented a cure that was not previously available; without the company the cure would not exist. So perhaps they should be allowed to charge what they will. And people are willing to pay large sums of money for medical promises that are known to provide no benefit. Health is a difficult area. One could argue for some federal involvement or oversight because health is an area that people are forced into (sickness is not usually a choice), and they often make decisions in a vulnerable state. Perhaps an issue for another time.

Nevertheless, the discussion got me thinking. Arguing for the free market using patented products has one on the back foot. Competition and productivity allow for low prices for consumers and wealth creation. Patents interfere with this mechanism.

Patents apply to intellectual property, which is not property at all. A better argument for patents (and copyright) is that the government allows a temporary monopoly to sell in acknowledgement that the person created the concept. Such reasoning for patents has some merit. If we accept this however, we are appealing to the government to enforce our monopoly. This raises the question as to whether the government can also have a say on the conditions of monopoly.

I think an argument can be made that allows the government to set minimum sales figures and maximum prices. The first is to prevent artificial scarcity, driving demand by intentionally limiting supply, a supply that cannot be made up by competitors. The second to limit profiteering, especially of a product that is excessively desirable such as a cure for cancer.

Now one could argue (as above) that these products would not exist if it were not for their inventors, and people are no worse off if such an item does not come to the market than they were prior to the invention. This is not necessarily the case however. People are creative. It is likely that several people would occasionally invent similar things to solve a problem. Here are a couple of situations.

The first is software. There seem endless patents in software for ideas that many programmers would solve given a problem. It seems that many patents are little more than a race to state (code) the obvious. There is true innovation, but not all of it is. If several programmers come up with a solution independent of each other and are hit with patent infringement, perhaps it wasn't that innovative.

The second is biomimetics. Many ideas arise from imitating an idea derived from the living world. Think velcro, though there are many others. Copying design from the living world has led to a plethora of new creations. Of course such activity still requires much research and subsequent experimentation. But again this is a race to copy more than be innovative. If several researchers copy the same part of an organism to create a similar machine or product, the first there gets all the benefit.

Some ideas arise from a single person and may be unlikely to arise in the near future otherwise. Our situation is not really different after such a product becomes available but prohibitive to acquire than what it was before that person invented it. However consider when similar ideas arise frequently. Our situation may improve as useful products become available and competition lowers price. But if the right to production limited to the first person to register it then the consumer fails to gain these benefits because other creators who are prepared to make and sell the product are prohibited from doing so. The monopolist may price the product significantly above production cost and outside the price range of many people, yet others who arrived at the idea independently and who are prepared to sell marginally above cost are prevented from doing so by law.

If we are to have a state enforced private monopoly for creativity via patent and copyright law then perhaps the state can dictate the conditions of the monopoly. Such a position would mean that creators could either patent or not patent a concept. If they choose not to patent they can sell the quantity they wish and charge what they will with the benefit of being the first to the market and the ability to maintain secrecy. Competitors would need to reverse engineer a product then copy it as best they can. If the creators choose instead to patent their concept then they gain a temporary monopoly enforced by the state but must sell a minimum number of products at a fixed price (or markup), both set by the state.

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