Wednesday, October 18, 2006

Innovation, intellectual property rights, patents and prizes: open-sourcing and crowd-sourcing.

A recent article in the New Scientist magazine by Nobel prize winning economist Joseph Stiglitz questions the effectiveness of the patents system in delivering innovation in the modern economy. Patents are intended to grant exclusive rights to inventors for the use of their inventions for a certain period after the registration of the patent. They thus effectively provide the firm with a monoply on the exploitation of the innovation and a chance to earn profits that will allow it to recoup its R&D expenditure before other firms can get in on the act. (Of course patent holders can grant licenses for others to make use of their ideas in return for payments, providing an alternative way of recovering initial outlays.) As we all know with a monopoly there can be higher prices and lower outputs than in a competitive market. There is a danger that the monopoly power granted to a patent holder could be abused. Stiglitz notes that courts around the world have found Microsoft to be guilty of such abuse of market power.

Stiglitz argues that the patents approach to innovation carries with it another danger. Sometimes knowledge that is in the public domain but does not have specific property rights attached to it is appropriated by a company who use it as part of a patent registration and thus effectively privatise it. People find that they now have to pay for the use the intellectual property concerned when before it was free. You could argue that the fault here lies not so much with the general idea of the patents system but with the inappropriate enclosing of already established knowledge. But Stiglitz also notes that conflicting claims over patents can make innovation more difficult. Until a legal dispute is clearly resolved nobody is able to make use of an innovation which is the subject of a patent dispute. A related point was made by Carl Shapiro in a paper published in 2001. He suggested that in an area subject to rapid technological change, such as ITC, a "patent thicket" can develop where there are so many new patents being granted that it becomes difficult to keep up with what has been registered and unwitting infringements of patents can easily occur.

Stiglitz's main concern relates to the pharmaceutical sector and the harm that unreasonably stringent enforcement of patents can cause for the availability of low cost life-saving drugs for fighting diseases such as AIDs and malaria. Although patent disputes in ITC might not be so immediately life threatening they can nevertheless inhibit the very innovation they are supposed to promote. And there is another legal and regulatory issue that Shapiro has identified. Cartels, price fixing and other forms of collaboration among market competitors are rightly discouraged and regulators take legal action under anti-trust laws to penalise firms that have been found to engage in such practises. But some fledgling markets may only get established if firms work together to establish agreed standards and protocols. Such collaboration and associated research should be seen as "pro-competitive" rather than anti-competitive and encouraged rather than discouraged. Shapiro distinguishes between competitition in the market and competition for the market. Once a market has been established competition between suppliers should be rigorously enforced, but at the early stages of a market's development regulators should recognise that some forms of cooperation and collaboration where expertise is pooled are not anti-competitive.

But what other models of innovation are there? Clearly incentives must play a key role here as rational behaviour would suggest that developers of new ideas will expect some kind of return for their efforts. One idea to have found favour recenly, and one which Stiglitz feels whose time has come, is the use of prizes that can be offered in return for successful innovative ideas. As he notes this approach is not totally new - the Royal Society of Arts in the UK has been advocating such an approach for many years. But perhaps it is catching on. In his freakonomics blog with Stephen J Dubner, Chicago economist Stephen D Levitt notes that the online DVD rentals company Netflix has offered a prize of $1 million for the development of a movie recommendation system that would improve the current take up rate by 10%. Rather than just researching in-house Netflix thus effectively outsources development work - but not to a single research team but to anybody out there. Jeff Howe, writing in Wired magazine, called this phenomenon "crowd-sourcing". However it seems to me that unless a prize is publicly funded it doesn't get over the patent problem. I don't believe that Netflix plans to share any improved recommendation scheme that is developed as a result of its prize offering with all and sundry. It will surely patent the system and then let others use it only under (paid) licence. Nevertheless I'm sure that the prize offer is a useful way of developing new ideas from beyond its own research team.

There is, of course, another approach to innovation that is particularly effective in the area of ITC, namely open-source development. The Mozilla Foundation for example, is a not-for-profit organisation that exists to promote the development of open-source software. Code for software such as the browser Firefox and the new e-mail system Thunderbird is made publicly available for anyone to look at and to provide improvements and to identify bugs. In a sense here the incentive is CV enhancement - work put in on software development is not entirely altruistic as career opportunities can be improved when it becomes known that individuals have been responsible for important contributions to such projects. I guess blogs are a bit like this too!



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