Subject: Re: "incentive void" (was Re: A different patent covenant...)
From: <stephen@xemacs.org>
Date: Mon, 23 Oct 2006 14:54:10 +0900

David H. Lynch Jr. writes:

 >     Patents do not create markets - I do not buy goods or services 
 > because they are patented.

Indeed they do.  They create *derivative* markets, markets for
licenses.  Such a market would not exist without the patent.  Similar
trading opportunities, such as "showing me yours if I show you mine",
do exist without the patent, but they suffer from all the usual
problems of barter.

This market offers real benefits to those who would rather code than
manage.  Without the patent, they have to take an equity position in
a firm ... but they have no redress if a rival outperforms their
managing partner.  With the patent, they can say, "cash, please; no
shares, no options."  And the frog must jump.

Does it work that way in practice?  Hard to say.  For example, in
theory the usual practice of having software engineers sign away all
their patentable ideas in advance should result in them having a
higher value in the labor market than if they kept their rights
... but that's very hard to measure.

 > I believe the theory of patents is that they secure a market -
 > making it viable particularly for small players to create something
 > where they percieve a market no one else has tapped, without fear
 > that much larger players can barge in and obliterate them sheerly
 > by size - that is the theory.

No, it's not the theory.  "Large rivals" has nothing to do with it:
the theory assumes that the (initially small) innovator can expand to
fill the market instantaneously---yet he still loses the price war
because he pays higher unit costs than his rivals do.  "Free-riding
rivals" is the problem that patent attempts to address.