the patent lottery:
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The Patent Lottery:. Exploiting Behavioral Economics for the Common Good. Shahil Patel & Rani IEOR 190G 5/9/2009. Section 1:. Summary. Overview. Legal studies research paper written by Dennis D. Crouch - PowerPoint PPT PresentationTRANSCRIPT
The Patent Lottery: The Patent Lottery: Exploiting Behavioral Economics for the Common Good
Shahil Patel & RaniIEOR 190G5/9/2009
SUMMARYSUMMARYSection 1:
OverviewOverviewLegal studies research paper written
by Dennis D. Crouch
Main Idea: “The benefits of using intellectual property as an innovation incentive must be balanced with concerns of holdup costs and potential monopoly harms. The lottery effect provides a tool that may help weaken the connection between these otherwise linked pros and cons.”
What is a “Lottery Effect”?What is a “Lottery Effect”?Objective of “State Lottery” is to collect
funds from people for public spending / social benefit
Statistics show that investors are sensitive to the size of the jackpot but insensitive to the probability of winning
Thus, State Lottery increases its “house rake” by marginally increasing the size of the jackpot
“Lottery Effect”: people are overly-optimistic and ignore the odds of success
Behavioral EconomicsBehavioral EconomicsAuthor’s arguments are founded in
behavioral economics
Branch that applies scientific research on social, cognitive and emotional factors to better understand economic decisions
Inventors treated in this paper as investors
Example – Availability heuristic News reports of an event’s occurrence increases a
person’s prediction of the frequency of the event Reports of successful innovation may increase the
perception of large payout, and neglect of low odds of future success
Expected Utility TheoryExpected Utility Theory You have two options:
Take $3,000 now with 100% certainty Or, you have an 80% chance at getting $4,000 vs.
20$ chance at $0
Expected payout of second option is higher, yet most people choose the first
Investors are assumed to be risk-averse
Then why are inventors not averse to taking such large risks by filing patents?
Patent Lottery EffectPatent Lottery EffectFuture payout, or “jackpot size” is the
primary motivation behind innovation
Inventors will over-estimate the payout of their inventions, but disregard their low probability of success
Same may hold true for “sets” of patents (i.e. patent portfolios)
Important distinction: inventors are insensitive to probability of success, but this probability MUST remain greater than zero
Application: Patent Law Application: Patent Law Policy Policy To increase social benefits, policymakers must
adjust patent rights by using policy levers Length of patent term Level of nonobviousness required for patentability Type of relief available against infringers
Goal is to maximize the upside (promote innovation) and minimize downside (monopolistic business activities, excessive litigation etc…)
Certain levers may increase an incentive to innovate with only a small increase In monopoly harm, while others may decrease monopoly harm with only small decrease on innovative activity
Case Study ICase Study I2006 Supreme Court case: eBay,
Inc. v. MercExchange, L.L.C eBay is the infringer MercExchange is not practicing its patent,
but still demands injunction Court decisions go back and forth
Ultimately, case is settled but court reduces the probability of injunction
According to author, this is decision follows the lottery effect model
Monopolistic rents minimized, while impact on private investor is small
Case Study IICase Study II2007 Supreme Court case: KSR
International Co. v. Teleflex, Inc. Court expanded the number of patents
that could be invalidated as obviousAccording to author, the decision
reduced the probability of obtaining a successful patent in the invalidated domain to zero
Decision also left ultimate potential payout unchanged
This violates the lottery model
ComparisonComparisoneBay case reflected positive
application of the lottery model Payout is the primary driver – by reducing
this, court minimized social rents Probability of success is decreased, but this
has minimal impact on innovationKSR reflected a negative
application by Supreme Court Payout is left unchanged – no effect on
social rents Probability of success is decreased to zero –
this has huge negative impact on innovation
PROJECT OVERVIEWPROJECT OVERVIEWSection 2:
Main ObjectivesMain ObjectivesReview this paper from analytical
perspective
Evaluate claims made by author
Closely examine the patent lottery effects model
Is the theory adequately supported by the provided model?
Initial ReactionInitial ReactionProvides an interesting new perspective on
inventor investment behavior through a creative application of behavioral economics
Adequately explains analogy of lottery effects
However, fails to make strong connection between lottery effects model and applications to patent law policy
Also, many ideas are either too simplistic or inadequately supported
CRITICAL ANALYSISCRITICAL ANALYSISSection 2:
Criticism ICriticism IIs INVENTOR behavior actually
similar to INVESTOR behavior?
Expected (Value of State Lottery) = Function of ($1 tkt price, jackpot payout,
probability)
Expected (Value of Innovation using Patent Lottery) =
Function of (price, payout, probability)
House rake clearly defined with state lottery, but not with patent lottery
Difficult to find EXPECTED VALUE using patent lottery because none of these variables are known
Criticism II Criticism II Small inventors have high affinity for risk-
taking, while “boldest technological innovations” happen outside of corporate culture
Thus, patent lottery effects only apply to small inventors
Further, this only helps us to understand “most valuable patents”
Is this a good enough sample of the population?
Criticism III Criticism III Patent lottery effect is only a
partial answerDoes not take into account
extrinsic motivations Desire to be first to market Shareholder value (i.e. impress VCs &
other investors) Insurance against future competition
Only briefly mentions these aspects
No substantial data
Criticism IV Criticism IV Author claims that the balance of
the variety of positive and negative social impacts "finance" the patent system and hence serve as "house rake" of patent lottery.
It is not clear exactly how one would calculate this house rake, or increase it.
Criticism V Criticism V Model i=J*P is too simplistic
It only has incentive I Only two levers are large payout J and the probability P
Author mentions both jackpot volatility and risk as aspects of patent lottery, but these measures are not accounted for in model
Hard to deduce how to maximize positive innovative activity, & minimize negative rents
There is no mention of how his model can be "tweaked” for a specific scenario.
Criticism VI Criticism VI Patent lottery construct is not the
only way to treat the adjustment of patent law policy
Author does not address these constructs, or specifically explain why his model is superior
Criticism VIICriticism VIIPaper cannot answer the following
question:
"Would you be willing to invest time and/or money in developing a new innovation that had only a small chance of reaping huge rewards, if you knew that the expected and most likely return would be less than your original investment?"
This is what every inventor wants to know.
Criticism VIIICriticism VIIIKSR vs. Teleflex case is a weak
exampleAuthor states that court decision to
expand invalidation of patents discourages innovation
This implies that court should not constrain innovation, even if it is unnecessary and unobvious
Also, the author does not address the minimization of rents associated with elimination of future litigation regarding the invalidated patents
Areas for Further Areas for Further ResearchResearchEmpirical results are needed to support
the claim that this model can be applied
Also assumptions for the model should be stated
For example, are there factors that would minimize litigation using this formula?
This research could be an inter-disciplinary effort so that the modeling approach is more thorough