The Economist has recently popularised the notion that patents are bad for innovation. Is this right? In my view, this assessment results from too high an expectation of what should be achieved by patents or other intellectual property.
Critics of intellectual property rights seem to think that they should be tested by whether they actually increase creativity. Similarly, in the field of competition law, commentators suppose that it is necessary to balance the innovation promoted by intellectual property against the competition safeguarded by competition law.
This approach tends to be too strict on intellectual property rights. In order to justify them and their exploitation on this basis it is necessary to show that they actually achieve an increase in innovation. By contrast for competition law to apply there is no need to show that its intervention would actually result in improvements in efficiency, only that it is necessary to maintain competition. It is assumed that, at least in the long run, competition promotes greater efficiency.
Intellectual property rights should not be seen as an alternative to competition, but rather as essential to enable competition in factors such as innovation and quality. In the absence of protection by intellectual property rights a business can often appropriate the benefit of a rival’s efforts in these areas instead of striving to better them.
In this respect intellectual property rights are similar to tangible property rights, which are necessary to enable competition in production, since otherwise it would be more profitable to steal the products made by a rival than to try to make similar products more efficiently.
Properly understood, intellectual property rights restrict competition in some factors (production and distribution) in order to enable and enhance competition in others (innovation and quality). So there is not really a need to reconcile a conflict between the protection of intellectual property and competition, but rather a need to find a balance between different forms of competition.
This balance is provided to a large extent by the rules of intellectual property law, which determine the scope of protection according to the subject-matter. However, competition law may further regulate this balance where the exploitation of intellectual property restricts competition in a way or to an extent that it is not justified for the protection of its specific subject-matter.
And whether that is the case can generally be tested by comparing competition in all aspects (including innovation and quality) resulting from the conduct in issue with the competition that would otherwise exist, taking into account the existence, ownership and justified scope of the intellectual property rights (the counterfactual). If the comparison is negative, competition law should in principle intervene.
Both intellectual property and competition law enable economic operators to profit by doing better than other economic operators and thereby encourage them to strive to do so, that is to compete. But whether more innovation, better quality, or more efficient production or distribution actually result depends on many other factors for which neither intellectual property nor competition law should be held responsible. Striving for improvement does not always succeed.
It should be considered sufficient that intellectual property and competition law provide a framework which enables economic operators to compete in innovation, quality and efficiency. We should look elsewhere, or wait a little longer, if greater innovation, quality and efficiency are not in fact achieved.
Feature image credit: I have an idea @ home, by Julian Santacruz. CC-BY-2.0 via Flickr.