1. © Suzanne Scotchmer 09/14/2004 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed R&D: How much, by whom? Public sponsorship: E.U. 44% U.S. 26% (down from about 35%) Brazil, Chile, Costa Rica and Mexico: substantially over half

2. © Suzanne Scotchmer 09/14/2004 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed Who patents, and where? (EU = the 15 EU states in 2002) Almost all patents are issued to Japanese, European, US inventors The “trilateral block” are about 13% of world population Relative populations Japan (16%) EU(47%) US (37%) Relative GDPs: Japan (18%) EU (36%) US(46%) What would we expect? Patents in these proportions In fact, there is a slight domestic bias. --About half of patents in the U.S. are non-American. --About half of patent applicants to the European Patent Office are non-European There is also a Japanese bias. About 80% of Japanese patents are to Japanese inventors, and Japanese inventors patent disproportionately in EU/US.

3. © Suzanne Scotchmer 09/14/2004 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed National Treatment, Reciprocity, Harmonization (A Short History of Treaties) Paris Convention 1884 (patents) Berne Convention 1886 (copyrights) –Included some harmonizations NAFTA and TRIPS 1990s SCPA 1984 : demanded reciprocity EU Database Directive 1996 : reciprocity

4. © Suzanne Scotchmer 09/14/2004 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed Observations We cannot study the efficacy of IP regimes by comparing countries. No heterogeneity in inventors’ incentives even if there is heterogeneity in national IP regimes. Domestic innovations create externalities abroad, whether they are in the public domain or patented. International profit flows affect domestic IP policies. (The literature on patent design ignores this.) Domestic policies may turn to IP instead of public science, to recover some of the externalities as profit. Thus, arguments that TRIPS went too far has a basis “in theory.”

5. © Suzanne Scotchmer 09/14/2004 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed Questions What might we mean by “optimal” international protections? What is the incentive to join treaties for national treatment? Within the national-treatment regime, what protections will countries choose “independently.” Will harmonization increase or decrease these protections? Which types of countries will prefer harmonized stronger protections?

6. © Suzanne Scotchmer 09/14/2004 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed A simple Model Size of market: v a The ratio or profit and deadweight loss is fixed, even if the market are different size Two regions: a,w Innovations differentiated by cost of innovation c Public sponsors are inefficient. Public cost is kc, k>1 vava mv a vava vava

7. © Suzanne Scotchmer 09/14/2004 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed Efficiency A multipart question (1) IP or public sponsorship? compare DWL to inefficiency of the public sector (2) geographic extent of protection. (3) level of innovation (do inefficiencies outweigh value?) Test (1): (k-1) c >< d (v a +v w ) ? Test (2) Ratio test: minimize ratio of deadweight loss to profit. For linear demand curves, the ratio is ½. No (global) efficiency consequences to extending protection Test (3). The standard one. DWL has two parts. Duplication in patent races. Reduction of DWL on inframarginal innovations

8. © Suzanne Scotchmer 09/14/2004 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed Three regimes These regimes are equally efficient in the sense of deadweight loss, provided the level of profit is the same. Three regimes 1. Autarky (reciprocal externalities) before the Berne and Paris Conventions 2. All inventors protected in all jurisdictions (post-TRIPS). 3. All inventors protected in one jurisdiction Pre-TRIPS, for some subject matters

9. © Suzanne Scotchmer 09/14/2004 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed The Political Economy Perspective National treatment: There is no incentive to provide it if a country can free-ride. However treaties are reciprocal. The reason to join is to get profit in foreign markets. Independent choices: Profit flows are two-sided (in and out). In view of this, will domestic choices be “too strong” or “too weak?” Harmonization: Will it strengthen protections? Harmonization: Which types of countries will argue for stronger protection? Source of following material: JLEO 2004 Political Economy of Intellectual Property Treaties.

10. © Suzanne Scotchmer 09/14/2004 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed Pathologies with independent choices “Free-riding” and inequity: Country “a” refuses to protect a subject matter because protection in country “w” gives enough incentives. (Why is this “free-riding”?) Unilateral protection by “wrong” country Bilateral failure to protect. Neither country protects because unilateral protection does not suffice. Countries fail to coordinate on protection. Too much IP, too little public sponsorship. Social test (compares costs, not profit flows) (k-1) c < d (v a +v w ) or (k-1) c < d v a Domestic test (profit flows): v a > c a and v a - kc a >  (v a +v w ) With public sponsorship, there is no way to repatriate the benefits conferred abroad.

11. © Suzanne Scotchmer 09/14/2004 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed First Best (coordinated) protections of subject matters (assume c a <c w ) dc a (k-1) (c a +c w ) k πca πca π(c a +c w ) IP a πcw πcw IP w d(c a +c w ) (k-1) IP a +IP w fwfw fafa Public Sponsorship vava

12. © Suzanne Scotchmer 09/14/2004 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed Independent Choices of what subject matters to protect π(c a +c w ) f IP in both regions or neither fwfw fafa vava  public sponsorship in equilibrium  P

13. © Suzanne Scotchmer 09/14/2004 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed What can harmonization accomplish? Can only strengthen protections, and will typically do so. Can solve the bilateral coordination problem (at least when there is no disagreement) Cannot remedy the unilateral failures (there is always disagreement over “free riding”) Harmonization may occur where public sponsorship would be better. Cannot remedy the failure to provide public sponsorship when domestic benefits are less than cost.

14. © Suzanne Scotchmer 09/14/2004 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed Harmonization: How do disagreements depend on asymmetries? Two asymmetries: size and innovativeness Size & innovativeness: correlated? Conflicting Effects: -- Size: larger countries want more public sponsorship abroad, and less IP -- Innovativeness: More innovative countries want more global IP

15. © Suzanne Scotchmer 09/14/2004 Contents May Be Used Pursuant to Creative Commons Attribution-NoDerivs-NonCommercial Common Deed Is the public sector an orphan? Space station: Mostly Russia and U.S. CERN nuclear physics facility Various telescopes around the world. Various research efforts of the World Health Organization (very limited)