Towards Locating Market Failure as an Outcome of Intellectual Property Regime: Mapping the IPR-Market-Society Interfaces

-Prof. Prashant Kulkarni Indus Business Academy

Presented at Conference on Management of Intellectual Property and Strategy, SJ Mehta School of Management, IIT Bombay, Mumbai- Feb 2012

Background

• Increasing focus on R&D (technology as answer to social complexities??)– Large R&D budgets; low commercialization• R&D intensity for Apple (3%) and for GE (2.5%)

• Changing Dynamics of Intellectual Property Protection– Function of national sovereignty to an unified

international regulation– Creativity vs Piracy

Knowledge Dynamics - Transforming a Public good to Private Good

Free rider

Public goods (non rival and non excludable)

Conversion into private goods through assignment of property rights

Underproduction of public goods eg. Knowledge

Traditional solutions

IP rationale- Traditional Notions under threat?

– Increasing cost of future innovation• Benkler (2006) and Janet Hope (2010)

– Increasing digitization• Characteristics of digital goods (Quah, 2002)• Rise of peer production (Benkler, 2006)

– Open Business Models (Chesbrough, 2007)– Tragedy of Anti commons (Heller)

Proposition

• IP regime creates market failure • Challenges the notion that failure of IP

protection causes market failure• Uses literature and case approach to support

the proposition

Intellectual Property- Industry Analysis Does Cost Structure- Utility Structure Linkages

explain IP differentials Utility structure

Cost structure

High fixed costs and low variable costs

Low fixed costs and high variable costs

Diminishes slowly

Automobiles, high end luxury goods, pharmaceuticals

Retail malls??

Diminishes faster

Music, entertainment, publishing

Clothing, apparel, shoes etc

Access Barriers, IP and the Consumer: Whose Choice should Prevail?

Consumers

Industry

Focus on Aesthetics and creativity

Focus on enhanced market power

Freedom of choice

Flourishing of creative culture, democratization of creativity

Consumer industry conflicts; piracy; circumventing access barriers by consumers

Imposed choices

Centralized element of culture

Choice dictatorship, rise of so-called cultural guardians

Does an individual has the freedom to express creativity or develop a cultural adaptation without the fear of being sued?

Regulatory Capture, National Sovereignty and Citizen Rights

Global Regulation – Depiction of Producer and Consumers Interests and Negotiations

Attribute Producers Consumers Democratic process Low Low

Unequal access to information and consequent outcomes : Producers

Low High; results in coercion by producers

Representation of all actors

Possible; aided by convergence of interests; reconciliation of differences easier

Several interests often conflicting and at cross work; difficult to organize; coherence low

Non domination Greater access to financial resources; possibility of regulatory capture; campaign financing

Difficult to negotiate from a position of strength; divergent interests unlikely to generate sufficient political pressure; high transaction costs

Source: Developed by the author based on Drahos and Braithwaite, Information Feudalism, EarthScan, 2001

• TRIPS as representative of modern mercantilism; an anti-thesis of competition

• Patents as public guarantee of private investment

• Movement away from product differentiation or cost leadership to public security on private activities

Anti-Commons and Missing Goods Puzzle- Hold-Ups and Alzheimer's cure

Source: Developed by the author

Patent holders

Firm develops new drug

Pay royalties Doesn’t pay royalties

Co-operate

Development of new drugs; in the instant case drug for Alzheimer’s disease

Open source discovery models

Hold out

Drug is developed; high costs may deter purchase of drugs

Law suits force abandonment of drugs

Resolving Market Failure

• Opening Braudel’s ‘Bell Jar’– IPRs should respond to needs of society and not

the other way round– Law follows social norms and conventions and NOT

replace social contract• Liberalize points of control– IPRs choke the flow of information– Remove the choke

• Focus on Uses of Copy than mere copy

• Brazil’s movement away from proprietary based models to non-proprietary models

• IP development be treated as public good than as club good

• Movement away from an outcome of benefits for concentrated interests against deep losses by a diffused set of consumers

• Patent Pooling

• Recognizing a trade off between producer rights retaining access control as against the consumer rights of trading in cultural expression priced in experiential and social values

Concluding Remarks

Questions????

-prashantkulkarni@rediffmail.com