IP policy, especially in the developed world, is utterly bonkers. For some reason, economists historically are less interested in innovation than in trade, so diversions from free trade tend to get economists up in arms, while crazy patent and copyright policy passes with nary a whisper. If you’ve not done work in this area, here is my brief summary of the state of the research. First, there is essentially no evidence that, outside of large, rich countries, patents and copyrights have any effect on innovation at all. Second, even in rich countries, the effect of patents and copyrights on the supply side are very limited, except in a few special areas (pharma and chemical products, particularly). Third, IP policy massively distorts what projects are being worked on. Fourth, in some areas (pharma is a good one, software is another, hip-hop is a third), patent and copyright “thickets” and problems of uncertain ownership have clear, negative effects on downstream innovation. Someone can correct me, but I know of not a single, well-regarded study in the past couple decades which has, theoretically or empirically, made a case for increasing the breadth or depth of IP protection. Nonetheless, there has been a massive expansion of the strength of patents and copyrights during the period: TRIPS, EU region-name restrictions, plans for protection of databases and fashion, longer copyright terms, etc. It’s mindboggling.
In a brand new NBER working paper, Yi Qian considers the case of counterfeits in China; I met Yi at the recent Searle Center Roundtable on the Law and Economics of Digital Markets. Her topic is of particular interest to me because I worked briefly in 2005 for the US Dept. of Commerce in Beijing on counterfeit issues. You would be amazed by the quality of the bootleggers there. One example we had was from a bottled water company. They put 10 or so special security features on their bottles, none of which were announced, in order to test the bootleggers. A couple months later, they found a counterfeit bottle that had replicated all but two of these features!
Yi has a fantastic dataset from the shoe industry. She traces shoes for sale from 1993 to the mid 2000s from 31 companies. In 1995, China essentially stopped bothering with counterfeit apparel and put their effort into stopping counterfeit gas tanks and other products which might prove a public safety risk. Shoe companies then set up their own brand protection agencies, and called the PRC government when they found evidence of infringement. Counterfeit entry soared. Some companies with great relations with the government (here, proxied by the amount of time it took each company to acquire ISO permits) were still able to shut down counterfeit factories, but others with poorer government connections were no longer able to do so. What were the effect of these counterfeits, using government pull as a proxy for the strength of anti-counterfeit protection?
There turn out to be three big effects. First, innovation, particularly in high-end shoes, increased for those brands least able to stop counterfeits. This actually isn’t surprising – had Salinger had no royalties from Catcher in the Rye, he probably would have written another novel! – but it totally counter to the usual copyright and patent maximalist arguments. Second, sales of low-end shoes, using product cost to IV for retail cost, were totally cannibalized by the counterfeiters. Third, sales of high-end shoes, particularly for less well-known brands, were helped by the presence of counterfeiters; the argument here is that the counterfeits helped “set the style” for certain brands/types and therefore increased sales of the real thing. This effect held up for many years after the counterfeit entry. Anecdotally, this was certainly true when I was in China: Louis Vuitton bags were widely copied, but the Chinese nouveau riche all preferred the real thing as soon as they could afford it. There is some sort of a network effect here. If you are buying a product so you can use it to show off your wealth, then you need the hoi polloi to actually recognize that your bag is expensive! The high-end shoes were tougher for the counterfeiters to suitably pirate, so keen eyes could still detect which shoes were the knockoff and which were the real deal.
http://www.nber.org/~yiqian/17.Qian_CounterfeitsFoesFriends.pdf (NBER Working Paper Feb 2011 – big up to Yi for posting this on her personal NBER site rather than only in the Working Papers Archive. The NBER ridiculously charges $5 to non-institutional readers for each paper they want. If anyone reading this has any power in the profession, would that they get this preposterous policy changed. It’s totally contrary to the spirit of free academic exchange, it exacerbates inequality between first and third world researchers, it leads to fewer readers, fewer citations and less influence, and in any case, internet-savvy readers can generally Google Scholar their way to a free copy with some (totally unnecessary) extra work. A hearty thumbs down to the NBER.)
Could you provide some reference on the positive effect of patents on pharma and chemicals?
Levin, Klavorick, Nelson & Winter (1987) – the so-called Yale Survey – basically asks R&D managers how they protect investments. Secrecy, first-mover advantage and other non-patent techniques dominate except in the two industries mentioned. This paper is very highly cited, so you can find more recent work about those industries by checking the forward citations on Google Scholar.
I’m with you on the insanity of the NBER charging for working papers, but give credit where it is due – they are free from third-world countries.