A new report is out from the Phoenix Center for Advanced Legal and Economic Public Policy Studies, authored by George S. Ford, Thomas M. Koutsky and Lawrence J. Spiwak on Quantifying the Cost of Substandard Patents:
Abstract: The purpose of patent policy is to balance the incentive to invent against the ability of the economy to utilize and incorporate new inventions and innovations. Substandard patents that upset this balance impose deadweight losses and other costs on the economy. In this POLICY PAPER, we examine some of the deadweight losses that result from granting substandard patents in the United States. Under plausible assumptions, we find that the economic losses resulting from the grant of substandard patents can reach $21 billion per year by deterring valid research with an additional deadweight loss from litigation and administrative costs of $4.5 billion annually. This brings the total deadweight loss created by our “dented” patent system to be at least $25.5 billion annually. These estimates may be viewed as conservative because they do not take into account other economic costs from our existing patent system, such as the consumer welfare losses from granting monopoly rents to patent holders that have not, in the end, invented a novel product, or the full social value of the innovations lost.
An interesting analysis. They do end with an important caveat:
We encourage proper caution in interpreting our findings. The models we use are simplified in many respects. As a consequence, our cost estimates should be viewed as preliminary or approximations. Further, we make no effort to “prove” either theoretically or empirically that the United States patent system is defective since there appears to be consensus on that point. Given the recent attention placed upon patent reform, our purpose is to provide estimates of the costs that the defective system imposes on society. In that, our preliminary estimates show that these costs are substantial, and the severity of the problem indicates that additional research and study of this important public policy topic is warranted.
One other calculation in the paper caught my attention. In 1988, Cockburn and Griliches estimated the average economic value of a patent as $1 million (in 1988 current dollars). Ford, Koutsky and Spiwak update that value to $2.4 million adjusting for both inflation and economic growth.
I think that is a useful update, but I would be careful in reading too much into it. The 1988 Cockburn and Griliches study is based on imputing value from the stock market and was done at a time when patents may not have been given as much market attention as they are now. Second, given the problem of a "loose" patent system that Ford, Koutsky and Spiwak describe, I'm not sure that an average means in 2007 what it did in 1988. An average from 1988 (when there were presumably fewer loose patents) has a much value as an average in 2007. What are you averaging -- the good patents and the bad? That hardly seems like a valid average.
So, where does that leave us? To quote the standard conclusion to any academic paper "more research is needed." In this case, that is really true.
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