This month IGL begins funding a research project by MIT and EPFL researchers on the market impact of patenting. This question is important because the granting of patent rights is a central public policy tool to incentivise innovation.
But the incentive that patents offer works indirectly - rather than directly subsidising R&D costs (as in other mechanisms, such as tax credits), or attempting to make up for any differences between the public and private incentives to research, patents provide incentive through product market protection. In particular, they exclude competing copycat technologies - and thus provide compensatory rents via greater prices or market share. However, such protection is far from guaranteed. If a rival firm is able to 'invent around' a patent, they may be able to offer as much competition as if the patent never existed. It is therefore an empirical question as to how much actual protection, and thus, incentive for innovation, patents really provide.
The newly-funded research aims to answer these questions around the market protection that patents provide. In particular, do products protected by patents face fewer competitor products? Do they achieve higher market shares? Higher profit margins?
So how will the project achieve this? By taking a set of patents with products active in the market and randomly dropping some, while maintaining protection on others. The market share and profitability outcomes on related products can then be compared across the treatment and control groups to see how big an impact the patent protection had provided.
Both IGL and the authors are excited as this project offers a first chance to get an experimental estimate of the effect of patent protection on market outcomes – an area where observational studies are often plagued by selection issues.