Reward Theory: Patent - Harvard University Theory Patent.pdf• By obtaining a patent, the innovator...

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Reward Theory: Patent

William Fisher

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Who Are Your Customers?

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Daron Rahlves

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Sam

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Brandon

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Market for Knee Brace

$

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Market for Knee Brace

$

Marginal Cost

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Market for Knee Brace

$

Marginal Cost

Willingness and ability to pay of consumer X

P(D)

D

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Market for Knee Brace

$

P(S)

S

Marginal Cost

Willingness and ability to pay of consumer Y

P(D)

D

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Market for Knee Brace

$

P(S)

S

Marginal Cost

Willingness and ability to pay of consumer Z

P(D)

D

P(B)

B

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Market for Knee Brace

$

Quantity

P(S)

S

Marginal Cost

Aggregate Consumer Demand

P(D)

D

P(B)

B

What will happen if I do not have IP protection?

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Market for Knee Brace

$

Quantity

P(S)

S

Marginal Cost

In the absence of patent, copying and competition will drive the price down close to marginal cost

P(D)

D

P(B)

B

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Market for Knee Brace

$

Quantity

P(S)

S

Marginal Cost

In the absence of patent, copying and competition will drive the price down close to marginal cost

P(D)

D

P(B)

B

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Market for Knee Brace

$

Quantity

P(S)

S

Marginal Cost

In the absence of patent, copying and competition will drive the price down close to marginal cost

P(D)

D

P(B)

B

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Market for Knee Brace

$

Quantity

P(S)

S

Marginal Cost

In the absence of patent, copying and competition will drive the price down close to marginal cost

P(D)

D

P(B)

B

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Market for Knee Brace

$

Quantity

P(S)

S

Marginal Cost

In the absence of patent, copying and competition will drive the price down close to marginal cost

P(D)

D

P(B)

B

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Market for Knee Brace

$

Quantity

P(S)

S

Marginal Cost

In the absence of patent, copying and competition will drive the price down close to marginal cost

P(D)

D

P(B)

B

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Market for Knee Brace

$

Quantity

P(S)

S

Marginal Cost

In the absence of patent, copying and competition will drive the price down close to marginal cost

P(D)

D

P(B)

B

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Market for Knee Brace

$

Quantity

P(S)

S

Marginal Cost

In the absence of patent, copying and competition will drive the price down close to marginal cost

P(D)

D

P(B)

B

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Market for Knee Brace

$

Quantity

P(S)

S

Marginal Cost

In the absence of patent, copying and competition will drive the price down close to marginal cost

P(D)

D

P(B)

B

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Market for Knee Brace

$

Quantity

P(S)

S

Marginal Cost

P(D)

D

P(B)

B Q

In the absence of patent, copying and competition will drive the price down close to marginal cost

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Market for Knee Brace

$

Quantity

P(S)

S

Marginal Cost

In the absence of patent, copying and competition will drive the price down close to marginal cost

P(D)

D

P(B)

B

Resultant Consumer Surplus

Q

•  By obtaining a patent, the innovator can prevent this dynamic

•  If there are no close substitutes for the invention, the patent gives the innovator market power

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Improved Knee Brace

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Improved Knee Brace

•  By obtaining a patent, the innovator can prevent this dynamic

•  If there are no close substitutes for the invention, the patent gives the innovator market power

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

•  By obtaining a patent, the innovator can prevent this dynamic

•  If there are no close substitutes for the invention, the patent gives the innovator market power

•  He can then set a price without fear of corrosion through competition

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

•  By obtaining a patent, the innovator can prevent this dynamic

•  If there are no close substitutes for the invention, the patent gives the innovator market power

•  He can then set a price without fear of corrosion through competition

•  Assume, for the moment, he charges all consumers the same price

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Figure 1: Profit-Maximizing Behavior by a Patentee

$

Quantity

C G

H

Marginal Cost

O

A

I

In the absence of Price Discrimination

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Figure 1: Profit-Maximizing Behavior by a Patentee

$

Quantity

C G

H

Marginal Cost

O

A

I

p

In the absence of Price Discrimination

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Figure 1: Profit-Maximizing Behavior by a Patentee

$

Quantity

C G

H

Marginal Cost

O

A

I

p

u

In the absence of Price Discrimination

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Figure 1: Profit-Maximizing Behavior by a Patentee

$

Quantity

C G

H

Marginal Cost

O

A

I

p

u

Revenues

In the absence of Price Discrimination

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Figure 1: Profit-Maximizing Behavior by a Patentee

$

Quantity

C G

H

Marginal Cost

O

A

I

p

u

Costs

In the absence of Price Discrimination

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Figure 1: Profit-Maximizing Behavior by a Patentee

$

Quantity

C G

H

Marginal Cost

O

A

I

p

u

Profits

In the absence of Price Discrimination

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Figure 1: Profit-Maximizing Behavior by a Patentee

$

Quantity

C G

H

Marginal Cost

O

A

I

p

u

In the absence of Price Discrimination

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Figure 1: Profit-Maximizing Behavior by a Patentee

$

Quantity

C G

H

Marginal Cost

O

A

I

p

u

q

In the absence of Price Discrimination

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Figure 1: Profit-Maximizing Behavior by a Patentee

$

Quantity

C G

H

Marginal Cost

O

A

I

p

u

q

v

In the absence of Price Discrimination

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Figure 1: Profit-Maximizing Behavior by a Patentee

$

Quantity

C G

H

Marginal Cost

O

A

I

p

u

q

v

Revenue loss

In the absence of Price Discrimination

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Figure 1: Profit-Maximizing Behavior by a Patentee

$

Quantity

C G

H

Marginal Cost

O

A

I

p

u

q

v

Revenue loss

Revenue gain

In the absence of Price Discrimination

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Figure 1: Profit-Maximizing Behavior by a Patentee

$

Quantity

C G

H

Marginal Cost

O

A

I

p

u

q

v

Profits

In the absence of Price Discrimination

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Figure 1: Profit-Maximizing Behavior by a Patentee

$

Quantity

C G

H

Marginal Cost

O

A

I

p

u

q

v

r

In the absence of Price Discrimination

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Figure 1: Profit-Maximizing Behavior by a Patentee

$

Quantity

C G

H

Marginal Cost

O

A

I

p

u

q

v

r

w

In the absence of Price Discrimination

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Figure 1: Profit-Maximizing Behavior by a Patentee

$

Quantity

C G

H

Marginal Cost

O

A

I

p

u

q

v

r

w

Revenue loss

In the absence of Price Discrimination

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Figure 1: Profit-Maximizing Behavior by a Patentee

$

Quantity

C G

H

Marginal Cost

O

A

I

p

u

q

v

r

w

Revenue loss

Revenue gain

In the absence of Price Discrimination

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Figure 1: Profit-Maximizing Behavior by a Patentee

$

Quantity

C G

H

Marginal Cost

O

A

I

p

u

q

v

r

w

Profit

In the absence of Price Discrimination

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Figure 1: Profit-Maximizing Behavior by a Patentee

$

Quantity

C G

H

Marginal Cost

O

A

I

In the absence of Price Discrimination

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Figure 1: Profit-Maximizing Behavior by a Patentee

$

Quantity

C G

H

Marginal Cost

Marginal Revenue

O

A

I

In the absence of Price Discrimination

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Figure 1: Profit-Maximizing Behavior by a Patentee

$

Quantity

B

C

D

E

F

G

H

Marginal Cost

Marginal Revenue

O

A

I

In the absence of Price Discrimination

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Figure 1: Profit-Maximizing Behavior by a Patentee

$

Quantity

B

C

D

E

F

G

H

Marginal Cost

Profit-maximizing output

Prof

it-m

axim

izin

g pr

ice

Marginal Revenue

O

A

I

In the absence of Price Discrimination

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Figure 1: Profit-Maximizing Behavior by a Patentee

$

Quantity

B

C

D

E

F

G

H

Marginal Cost

Profit-maximizing output

Prof

it-m

axim

izin

g pr

ice

Monopoly Profits

Marginal Revenue

O

A

I

In the absence of Price Discrimination

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Figure 1: Profit-Maximizing Behavior by a Patentee

$

Quantity

B

C

D

E

F

G

H

Marginal Cost

Profit-maximizing output

Prof

it-m

axim

izin

g pr

ice

Monopoly Profits

Marginal Revenue

O

A

I

In the absence of Price Discrimination

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Figure 2: Economic Effects of Profit-Maximizing Behavior by a Patentee

$

Quantity

B

C

D

E

F

G

H

Marginal Cost

Profit-maximizing output

Prof

it-m

axim

izin

g pr

ice

Monopoly Profits

O

A

I

Consumer Surplus

© 2008, William Fisher. This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

Figure 2: Economic Effects of Profit-Maximizing Behavior by a Patentee

$

Quantity

B

C

D

E

F

G

H

Marginal Cost

Profit-maximizing output

Prof

it-m

axim

izin

g pr

ice

Monopoly Profits

O

A

I

Consumer Surplus

Deadweight Loss (foregone consumer surplus)

E