A Critical Assessment Of The Economics Of Ip



This paper attempts to analyze the economic implications of Intellectual Property Rights on Competition Policy, especially referring to two main facets of this topic: non-rival goods and the exclusivity of the property right. Moreover, it will be explained an alternative to the current patent system: compulsory licensing.

A non-rival good is considered that good which can be consumed by an individual without prevent other people from doing it. The Intellectual Property Rights (IPRs) have been created in order to promote innovation where it was no-sense do it (assuming the rationality of innovators). This is due to the fact that, in a specific sector and/or industry, the products put in the market are mainly non-rival goods and, so, there are no incentives to innovate just because each entity could benefit from them (and not only the innovator firm). In this sense, the IPRs are one of the most effective way to protect firms' interests, removing the pure competition and, so, providing them a legal monopoly.

The Intellectual Property Rights give to their owner the right to exclude other entities from their exploitation and the right to sell them. IPRs, just because they contain these rights, are very limiting since they cover many aspects of the good in question.
Since IPRs include the right to exclude, there are no economic foundations for them and, moreover, the system should take into account the variety of the sectors, professor Marengo1 offered an alternative to them in order to promote innovation without any exclusions: compulsory licensing. It is one of the flexibilities on patent protection included in the WTO’s agreement on intellectual property: this licensee entitles the IPR owner the right to exploit the referred good, but it forces the holder to give access to it (after payment). In this case, it avoids any downstream restriction to the utilization of the innovation.


2.1 GlaxoSmithKline plc

The pharmaceutical sector is characterized by a wide cognitive component: a product can be made just only having its formula; there is not a big tacit practical component.

This sector has heavily suffered of the patent’s expansion during the last years, above all the possibility to split the property right of an innovation in many different patents.

The “originator” companies have to sell their products at higher price compared with the “generic” companies in order to cover research and development’s costs, that are very high. It is also due to this fact that in this sector many pharmaceutical firms tend to cover the same product with many patents and each of them protects each aspect and process (“patent clusters”). This leads to an overexploitation of the patent system that causes difficulties in managing and so impede innovation.

Controversially, it was on behalf of innovation that GlaxoSmithKline has refused, for a certain period, to supply some products to its wholesalers and distributors. GlaxoSmithKline has the property right over these products because it holds IPR over them.

From a different point of view, in the case in which patents would be subjected to compulsory licenses, the wholesalers that before distributed Glaxo’s medicines, now can sell the same products purchased from Glaxo’s competitors who have bought the access to its IPR. In this case, there would not be the problem to calculate the “ordinary quantity” under which GlaxoSmithKline cannot refuse to supply its distributors.

2.2 Microsoft

The information technology sector is different from that one discussed in the previous paragraph. The first one is characterized by a big tacit component constituted by personal knowledge, know-how, learning by doing and so on. In this sector, many firms cover their innovations by patents even if it would be unnecessary just because to reply a technological innovation it is not sufficient to know its physical components by which it is consisted (patent paradox).

In this sense, a compulsory licence would be sufficient to guarantee to the technological firm incentives to innovate without disturbing the competition inside the industry; this due to the fact that, by this mean, the firm who wants to access to the licence has to pay a certain amount of money at the innovator firm and, however, does not receive all the tacit information useful to duplicate the technological innovation. In order to do this, some personal knowledge are necessary and they cannot be transferred into a code or something else. Here is why, in the Microsoft case, it cannot be stated that, divulging all interface information in order to achieve full interoperability with Microsoft’s servers, Microsoft would not have anymore the incentive to innovate. In fact, the Commission decided that “Microsoft’s incentives would be strongly reduced if Microsoft were entitled to continue refusing to supply the requested interoperability information”2 .


Competition policy would be significantly transformed if the “compulsory licensing” vision was introduced, instead of maintaining the complicated patent system, in those sectors where this new approach is sufficient in order to keep a fair competition and guarantee incentives to innovate at the same time. In this situation the patent system would be more efficient. However some questions would be open yet: can we state that the “compulsory licensing” approach is more suitable in one sector rather that in another one? What are the costs concerning the enforcement of this method?

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