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1、Econ 522 Economics of Law,Dan Quint Fall 2011 Lecture 7,1,Established properties of an efficient property law system Private goods are privately owned, public goods are not Owners have maximum liberty over how they use their property Injunctive relief used when transaction costs are low, damages use
2、d when transaction costs high We tried “testing Coase” through an experiment Can UW undergrads reallocate poker chips efficiently? (Cost me $124),Monday,2,Take 1: Full Information (values on nametags),Our experiment,26/28 = 93%,58,60,32,purple chip,2,purple chip,4,purple chip,4,(sorry),6,purple chip
3、,6,purple chip,purple chip,8,purple chip,purple chip,red chip,8,purple chip,purple chip,10,purple chip,purple chip,10,red chip,red chip,12,fraction of potential gains realized,actual final allocation,efficient allocation,starting allocation,3,Take 2: Private Information (values hidden),Our experimen
4、t,18/24 = 75%,42,48,24,purple chip,2,purple chip,3,purple chip,3,4,purple chip,purple chip,4,red chip,purple chip,6,purple chip,red chip,6,purple chip,purple chip,8,purple chip,purple chip,8,purple chip,red chip,10,fraction of potential gains realized,actual final allocation,efficient allocation,sta
5、rting allocation,4,Take 3: Uncertainty Take 4: Adverse Selection,Our experiment,100%,12,12,8,chip,2 X die roll (actually 8),chip,chip,3 X die roll (actually 12),fraction of potential gains realized,actual final allocation,efficient allocation,starting allocation,0%,12,18,12,chip,2 X die roll (actual
6、ly 12),chip,chip,3 X die roll (actually 18),fraction of potential gains realized,actual final allocation,efficient allocation,starting allocation,5,Coase works pretty well, except under asymmetric info Full info: 93% of gains achieved Private info: 75% Uncertainty: 100% Asymmetric info: 0% Comparing
7、 “uncertainty” to “asymmetric info” Sellers value was 2 X die roll, buyers value was 3 X die roll If nobody knows die roll, no problem they can trade based on the expected value But if seller knows die roll, problem In strategic settings, information can have negative value the seller could be worse
8、 off for having information!,Conclusion,6,(old exam question, question by Alex Tabarrok at Marginal Revolution blog) In Virginia, the common law has long held that if a neighbors tree encroaches on your yard you may cut the branches as they cross the property line, but any damage the tree does to yo
9、ur property is your problem. Your neighbor can even sue if your pruning kills the tree. In 2007, the Virginia Supreme Court overruled this 70-year-old precedent, making it your neighbors duty to prune or cut down the tree if it is a “nuisance.” Which is better: the new rule or the old? What would th
10、e Coase Theorem say about the two rules?,Discussion question,7,Applications of Property Law,8,Intellectual property: broad term for ways that an individual, or a firm, can claim ownership of information Patents cover products, commercial processes Copyrights written ideas (books, music, computer pro
11、grams) Trademarks brand names, logos Trade Secrets,Intellectual Property,9,Example: new drug Requires investment of $1,000 to discover Monopoly profits would be $2,500 Once drug has been discovered, another firm could also begin to sell it Duopoly profits would be $450 each,Information: costly to ge
12、nerate, easy to imitate,up-front investment: 1,000 monopoly profits: 2,500 duopoly profits: 450 each,10,Solve the game by backward induction: Subgame perfect equilibrium: firm 2 plays Imitate, firm 1 plays Dont Innovate, drug is never discovered (Both firms earn 0 profits, consumers dont get the dru
13、g),Information: costly to generate, easy to imitate,FIRM 1 (innovator),Innovate,Dont,FIRM 2 (imitator),Imitate,Dont,(-550, 450),(1500, 0),(0, 0),up-front investment: 1,000 monopoly profits: 2,500 duopoly profits: 450 each,11,Patent: legal monopoly Other firms prohibited from imitating Firm 1s discov
14、ery Subgame perfect equilibrium: firm 2 does not imitate; firm 1 innovates, drug gets developed,Patents: one way to solve the problem,FIRM 1 (innovator),Innovate,Dont,FIRM 2 (imitator),Imitate,Dont,(-550, 450),(1500, 0),(0, 0),up-front investment: 1,000 monopoly profits: 2,500 duopoly profits: 450 e
15、ach,450 P,12,Comparing the two outcomes,FIRM 1 (innovator),Innovate,Dont,FIRM 2 (imitator),Imitate,Dont,(-550, 450),(1500, 0),(0, 0),up-front investment: 1,000 monopoly profits: 2,500 duopoly profits: 450 each,FIRM 1 (innovator),Innovate,Dont,FIRM 2 (imitator),Imitate,Dont,(-550, 450 P),(1500, 0),(0
16、, 0),Without patents: Drug never discovered With patents: Drug gets discovered But,13,Without patents, inefficient outcome: drug not developed With patents, different inefficiency: monopoly! Once the drug has been found, the original incentive problem is solved, but the new inefficiency remains,Pate
17、nts solve one inefficiency by introducing another,CS 1,250,Profit 2,500,P = 50,P = 100 Q,Q = 50,DWL 1,250,CS 4,050,Profit 450 x 2,P = 10,Q = 90,DWL 50,Monopoly,Duopoly,up-front investment: 1,000 monopoly profits: 2,500 duopoly profits: 450 each,Net Surplus = 2,750,Net Surplus = 3,950,14,First U.S. p
18、atent law passed in 1790 Patents currently last 20 years from date of application For a patent application to be approved, invention must be: novel (new) non-obvious have practical utility (basically, be commercializable) Patentholder whose patent has been infringed can sue for both damages and an i
19、njunction against future violations Patents are property can be sold or licensed to others,Patents: a bit of history,15,Narrow patents might allow us each to patent own invention Broad patents might not “Winner-take-all” race to be first,Patent breadth,16,Does a patent on the “pioneering invention”
20、cover the application as well? Can you patent an improvement to an existing product?,Patent breadth,17,Patent length Need to last long enough for firms to recover up-front investment But the longer patents last, the longer we have DWL from monopoly (Example from textbook: drug price drops from $15 t
21、o $1 per pill when patent expires) Tradeoff between ex-post inefficiency and ex-ante incentive provision U.S.: all patents last 20 years Jeff Bezos (founder of Amazon) once suggested software patents should last just 3 years Germany: full-term patents for major inventions, 3 year “petty patents” for
22、 minor ones, annual renewal fees,Patent length,18,Coase: without transaction costs, initial allocation of rights irrelevant for efficiency But transaction costs may be high Uncertainty on whether a patent is valid Uncertainty of outcome of research Many parties,Do the details matter?,19,Coase: witho
23、ut transaction costs, initial allocation of rights irrelevant for efficiency But transaction costs may be high Uncertainty on whether a patent is valid Uncertainty of outcome of research Many parties,Do the details matter?,20,Coase: without transaction costs, initial allocation of rights irrelevant
24、for efficiency But transaction costs may be high Uncertainty on whether a patent is valid Uncertainty of outcome of research Many parties,Do the details matter?,21,government purchase of drug patents prizes Google $30 million prize for landing a rover on the moon direct government funding of researc
25、h 25% of research spending in U.S. is funded by government,Alternatives to patents for encouraging innovation,22,patents copyrights trademarks trade secrets,23,Property rights over original expressions writing, music, other artistic creations Creations like this tend to fit definition of public good
26、s nonrivalrous nonexcludable so private supply would lead to undersupply Several possible solutions government subsidies charitable donations legal rights to creations copyrights,Copyright,24,Copyright law less rigid than patent law Unlike patent law, allows for certain exceptions Copyrights last mu
27、ch longer than patents Current U.S. law: copyright expires 70 years after creators death No application process Copyright law automatically applies to anything youve written/created Copyrights more narrow than patents Cover exact text, not general idea,Copyright,25,Retelling of Gone With The Wind, f
28、rom point of view of a slave on Scarletts plantation, published in 2001 Margaret Mitchells estate sued to halt publication Eventually settled out of court Was there really any harm?,Copyright,26,Retelling of Gone With The Wind, from point of view of a slave on Scarletts plantation, published in 2001
29、 Margaret Mitchells estate sued to halt publication Eventually settled out of court Was there really any harm?,Copyright,27,patents copyrights trademarks trade secrets,28,Trademarks,Reduce confusion over who made a product Allow companies to build reputation for quality Dont expire, unless abandoned
30、 Generic names cant be trademarked,29,Trademarks example,WSJ article 9/17/2010: “Lars Johnson Has Goats On His Roof and a Stable of Lawyers To Prove It” Restaurant in Sister Bay WI put goats on roof to attract customers “The restaurant is one of the top- grossing in Wisconsin, and Im sure the goats
31、have helped.” Suing restaurant in Georgia “Defendant has willfully continued to offer food services from buildings with goats on the roof” http:/ dilution,31,patents copyrights trademarks trade secrets,32,Protection against misappropriation But plaintiff must show Valid trade secret Acquired illegally Reasonable steps taken to protect it,Trade Secrets,33,patents copyrights trademarks trade secrets,