Econ 225: Class Participation Exercise #6

Has Innovation Gotten Lost in a Patent Thicket?

Jun Ishii ∗
Department of Economics
Amherst College

Spring 2018

The basic dilemma underlying the economics of innovation is as follows: the discovery process lead-
ing to successful innovation may be costly but the dissemination of the innovation costless. Without
government intervention, an innovator may not be able to recoup her discovery costs – discouraging
others from engaging in costly investment in innovation. This line of thinking motivates Article I,
Section 8 of the U.S. Constitution which grants Congress the power to “... promote the progress of
science and useful arts, by securing for limited times to authors and inventors the exclusive rights to
their respective writing and discoveries.” The Article is the basis for U.S. patent and copyright laws.

The idea of a patent seems simple enough. Enable the innovator to exercise market power over a
limited period of time during which she may recoup her innovation costs. Once the limited period
is over, the innovation is made freely available to the public. But the practice of patenting is
more complicated. In the minimum, for each patent, the government must decide on the scope
and enforcement of the patent. The naive view of patents assigns absolute property rights to the
patent holder during the patent life. But, in reality, enforcement of patents is not absolute, sub-
ject to interpretation by a court of law. This has lead to the modern view of “probabilistic patents.”

Additionally, there is growing concern that the U.S. Patent and Trademark Office (USPTO) is cur-
rently approving patents that are wide in scope but questionable in enforceability; the wide scope
makes it more likely that the patent overlaps earlier innovation (“prior art”) – a finding that would
invalidate the patent. Such patents are dubbed “weak patents” and are seen as being pervasive
in the software industry. Some firms have responded to the rise of “weak patents” by investing in
“patent thickets” – portfolios of related weak patents. While no one weak patent may be sufficiently
enforceable, the entire collection of weak patents may be. Software firms now compete with each
other not only with their products but also with their patent thickets.

In this Class Participation Exercise, you will discuss how strong software patents should be. Some
have advocated eliminating software patents, replacing them with trade secrets. Others have ad-
vocated for much stronger enforcement of software patents. The current system of weak patents
and patent thickets lies somewhere between the two views.

∗
Office: Converse Hall 315 E-mail: jishii@amherst.edu
Read the following on current disputes involving software patents
• “Google’s Acquisition of IBM Patents May Aid its Oracle Case,” cnet News, 1/3/2012,
http://www.cnet.com/news/googles-acquisition-of-ibm-patents-may-aid-its-oracle-case/
• “Will Google have to Start a Patent War to get $9bn of Value from Motorola,” The Guardian,
1/29/2012,
http://www.guardian.co.uk/technology/blog/2012/jan/29/google-motorola-android-future
• “Yahoo Warns Facebook of a Potential Patent Fight,” New York Times, 2/27/2012,
http://dealbook.nytimes.com/2012/02/27/yahoo-warns-facebook-of-a-potential-patent-fight/
• “As It Warned, Yahoo Sues Facebook over Patents,” New York Times, 3/12/2012,
http://dealbook.nytimes.com/2012/03/12/yahoo-sues-facebook-over-patents/
• “Facebook Accuses Yahoo of Infringing Patents,” New York Times, 4/3/2012,
http://dealbook.nytimes.com/2012/04/03/facebook-accuses-yahoo-of-infringing-on-patents/
• “Yahoo and Facebook Settle Patent Lawsuits,” New York Times, 7/6/2012,
http://dealbook.nytimes.com/2012/07/06/yahoo-and-facebook-said-to-settle-patent-lawsuits/
• “When Patents Attack,” National Public Radio (NPR), 7/22/2011,
http://www.npr.org/blogs/money/2011/07/26/138576167/when-patents-attack
(You can listen to this one – an episode of “This American Life”)
Read the following academic literature on patents
• “Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard Setting,” by
Carl Shapiro, Chapter 4 of Innovation Policy and the Economy, Vol. 1, 2001, MIT Press,
pp.119-150 (nav pthicket.pdf)
• “Probabilistic Patents,” by Mark Lemley and Carl Shapiro, Journal of Economic Perspectives,
19(2), Spring 2005, pp.75-98 (ls05.pdf)
• “Introduction to the Economics of Trade Secrets,” by Josh Lerner, available online at
http://www.people.hbs.edu/jlerner/TSintro.html
• Recommended from the general readings for this week: make sure to read Baker’s comments
on “Arrow vs. Schumpeter” and (at least) skim Hall and Harhoff’s survey
Based on the reading above, write a 3-5 page report discussing how strong software patents should
be. You will want to think about
• short-run versus long-run considerations
• role of patents in spurring innovation in the software industry
• innovations as complements or substitutes
• large and small innovators
• resources devoted to the patent office
In addition to the report, you will be expected to participate in the Wednesday, April 25th lecture.
The report is due beginning of class, April 25th.