Intellectual Property, Economics Of

Promoting Innovation

The principal economic justification for IP derives from the inability of a competitive market to support an efficient level of innovation. In a competitive economy, profits will be driven to zero in equilibrium. Therefore, a company will have difficulty appropriating a return on investments in research and development because the knowledge that is produced will often be ascertainable by potential competitors at substantially lower cost than that required to make the innovation in the first place. Many product innovations [Page 798]can be perceived by inspecting or experimenting with the product. Process inventions, which reduce the costs of manufacturing or improve the quality of the product, may be more easily concealed, but there is still the risk of disclosure, such as by former employees. The authorship of expressive works, such as books, films, and musical compositions, faces the same problem because such works can entail substantial investment, are intended to be perceivable by consumers, and can be readily copied. It is unlikely that works requiring substantial investment would be produced if competitors could quickly enter the market after a work is disseminated and offer copies of comparable quality at the costs of reproduction.

Patents and copyrights directly address the problem of appropriating a stream of income from investments in innovation by affording inventors or authors exclusive rights to their creative accomplishments for a limited period. In this way, the prospect of exclusivity in the marketplace potentially offsets the costs and risks associated with innovation and creative endeavors, thereby promoting investments in research and development. Trade secret law also seeks to promote innovation, although it pursues this objective through a very different mechanism. Notwithstanding the advantages of obtaining exclusive rights (albeit for a limited period), inventors may choose to protect their innovation by keeping it a secret. This mode of protection is not available for innovations that are readily ascertainable from products released into the stream of commerce, but it can be useful to protect process innovations and product innovations that can be encrypted or otherwise concealed. Inventors may feel that the cost and delay of seeking a patent are such that they can more effectively profit from their investment through secrecy. They might also believe that the invention can best be exploited over a longer period than a patent would allow. Although trade secret law does not limit the use of ideas once they have become publicly known, it does significantly reduce the costs of protecting secrets within the confines of the research and commercial environment. An inventor who takes reasonable steps to maintain secrecy can obtain strong remedies against individuals within the laboratory or commercial enterprise and those subject to contractual limitations for misappropriation of trade secrets.

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