Economics of Intellectual Property Law

Economics of Intellectual Property Law

Forthcoming
Oxford Handbook of Law and Economics1
March, 2014

Robert P. Merges
UC Berkeley School of Law

Abstract

This Chapter highlights two major differences between early or “first wave”
scholarship in the field of intellectual property (IP) law, and the work of more
contemporary “second wave” researchers: (1) increased attention to IP rights in a
broader economic context (contextualization); and (2) greater methodological
diversity. This Chapter is organized around these two themes. I first discuss the
many ways that second wave scholarship seeks to show how IP rights are
embedded in broader economic contexts, and thus diverges from first wave
research which tended to focus exclusively on IP rights as the central determinants
of economic activity. Next I consider the many different methodologies now being
deployed to study issues in the economics of IP rights – from large-‐scale empirical
work to surveys to interviews to experimental research.

By contextualization, I mean this: second wave IP scholarship sees formal IP
rules as being embedded in a larger economic context. This scholarship argues that
only by understanding this larger context can we understand the true impact of
formal legal rules on “the rate and direction” of cultural change and technological
growth. To illustrate, I describe three areas of contemporary research. The first
concerns fields where formal IP is absent, but researchers nevertheless find
evidence of significant creative activity. These are sometimes called “IP’s negative
spaces.” I describe some of these studies, pointing out both strengths (such as
interesting ethnographic detail) and weaknesses (primarily theoretical
overclaiming). Next I explore the relationship between IP rights and technological
platforms. The goal here is to show how economic actors deploy IP rights in one
particular setting: where maximizing profits involves a mixture of open access to
some features of a system, and proprietary control over others. Third, I review
recent theorizing on IP rights and the boundaries of the firm. The idea here is that
the strength and scope of IP rights play a role in important determinants of industry
structure, particularly overall transaction costs and the division of labor. For
example, stronger IP enables small teams to organize themselves as independent

1 This Chapter will appear in Francesco Parisi (ed.), Oxford Handbook of Law and
Economics, Oxford University Press (forthcoming).

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firms, because IP makes possible arm’s length transactions involving IP-‐intensive
components and pure ideas.

I next turn to the second major trend in recent IP studies, methodological
diversity. I describe contributions in the areas of empirical IP studies, models and
analytics, and the emerging field of experimental IP research. The richness and
diversity of contemporary studies makes for a stark contrast with older first-‐wave
research. I argue in this section that, from the point of view of IP policy, this
diversity of research methodologies points to a very promising prospect. When
results from multiple, disparate methodologies converge, we can be more certain
that we are seeing evidence of a policy that makes solid sense. Out of the welter of
contemporary approaches to IP research, then, consensus might emerge. And when
it does, we will see the payoff of the many new and exciting approaches to this most
dynamic of legal fields.

1. Introduction

It is useful once in a while to look at a complex thing in whole cloth, instead
of thread by slender thread. When I do that with intellectual property, here is what I
see. I see that IP is beginning to live up to the aspirations of an earlier generation,
which yearned to make law a much more expansive field of study, one that
integrated the insights of sociology, history, psychology, and economics. All these
threads are in place in the IP field now. Gone are the days when virtually every
article on the subject began and ended with a discussion of case law and statutes.
Now, though straight doctrinal work is far from dead, the pages of academic journals
are alive with studies of all facets of IP law, informed and influenced by a wide range
of academic disciplines. These disciplines supply a cornucopia of tools, which
scholars put to work on all sorts of issues and problems. Scholars no longer stick to
the close knitting of IP statutes and cases. What we have now is a very lively
tapestry.

Take for instance the outlines of a typical article from IP’s “classical” period.
Starting from well-‐accepted background assumptions – that IP law is about
incentives, for example; or that education is an important value and ought to be
fostered by IP law – a scholar would approach a recent line of cases, or an important
decision by the Supreme Court.2 Such facts as entered into the discussion would be
drawn from the legal record in the case. The influence of older cases would be
plumbed and dissected. Implications from a legal holding would be fleshed out –
incentives are reduced, for example, by tightening patent standards; or educational
values will be undermined, by constricting fair use. Based on these observations, the
author would advise doctrinal course corrections to set things right.

2 See, e.g., Kitch, 1966; see also Adelman, 1977.
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Contemporary work is very different. A book or article might be addressed to
foundational assumptions. How does IP work in the overall context of creativity in
an industry? What kind of growth has the industry undergone, and what if any role
has IP been shown to play in that?3 Do firms and people in the industry rely on
informal norms or other techniques – apart from formal IP rights – to protect
investments in creative works?4 And, within the province of IP doctrine, how do
courts actually apply the doctrines found in IP law?5 From a completely different
perspective, a scholar might address the cost side of IP protection: what happens in
the market when IP rights expire – for a patented pharmaceutical, for instance, or a
copyrighted book?6 To be sure, the literature continues to address topics of interest
to first-‐wave scholars. Does IP really operate as a viable incentive? In a particular
industry or field of creativity? How does IP compare to other motivations and
incentives that drive creativity, generally and in specific industries? Did a change in
the law actually lead to greater or lesser investment or activity?7

These examples highlight two major differences between early or “first
wave” scholarship and the work of more contemporary “second wave” researchers:
(1) increased attention to IP rights in a broader economic context
(contextualization); and (2) greater methodological diversity. This Chapter is
organized around these two themes. I first discuss the many ways that second wave
scholarship seeks to show how IP rights are embedded in broader economic
contexts, and thus diverges from first wave research which tended to focus
exclusively on IP rights as the central determinants of economic activity. Next I
consider the many different methodologies now being deployed to study issues in
the economics of IP rights – from large-‐scale empirical work to surveys to
interviews to experimental research.

II. Contextualization

3 See, e.g., Allison, Dunn and Mann, 2007 (patents and the software industry); Mann
and Sager, 2007 (patents and startup firms in the software industry).

4 See, e.g., Raustiala and Sprigman, 2012.

5 See, e.g., Beebe, 2008 (empirical study of copyright’s fair use factors); Sag, 2012
(analyzing copyright cases so as to predict the outcome of fair use disputes).

6 See Buccafusco and Heald, 2013. See also Bechtold and Tucker, 2013 (court ruling
relaxing trademark enforcement against Google “keyword” ad sales in Europe had
little effect on user visits to trademark owners’ websites).

7 Another type of study tests assumptions behind doctrine or doctrinal change. See,
e.g., McKenna, 2009 (testing trademark law’s assumption that consumers may be
confused when a trademark owner’s mark is used in markets unrelated or ancillary
to the owner’s primary markets).

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As a fine poet once wrote, “I have had to learn the simplest things last.”8 This
seems true of IP economics. While the earliest forays into the field tended to see the
legal rules concerning IP protection as part of a broader set of issues relating to
investment in creative works (e.g., Levin, Klevorick, Nelson and Winter, 1987), much
of first wave scholarship conceived of formal IP rights as the sole determinant of
various types of economic activity.9 (This is of course a feature of comparative
statics, with its famous – in some quarters, infamous – assumption of ceteris
paribus.) As applied to IP in its early days, law and economics was concerned with
the net welfare effects of tweaking specific rules and doctrines. A crucial
contribution of the second wave of IP economics has been to widen the field of view
within which economic activity is studied.10 In this new approach, legal rules are but
one determinant of activity in the creative sectors of the economy. Other aspects are
just as important: industry norms; technological protections; structural factors such
as lead time (i.e., degree of difficulty to copy new products), the effectiveness of
trade secrecy, and the ability to bundle innovative products with other products or
services over which a firm has pricing power so as to recoup investments in
innovation.11 Even alternative policy mechanisms such as R&D tax credits or firm
relocation credits come into play.

8 Charles Olson. Maximus, to Himself (1983). The full lines are “I have had to learn
the simplest things/last. Which made for difficulties.”

9 See, e.g., Pigou [1924], Clark [1927], and Plant [1934]. For an excellent overview of
this and other early work, see Peter Menell and Suzanne Scotchmer, Intellectual
Property, chapter in Handbook of Law and Economics, edited by A. Mitchell Polinsky
and Steven Shavell (2007), avail. at

10 A body of work by the noted economist of technological change, Richard Nelson,
stands either as a glaring exception to the standing assumptions of the first and
second wave, or as the vanguard of the third wave; and perhaps both. See, e.g.,
Nelson and Rosenberg, 1993 at 3, 4-‐5 (“[T]he concept [of a system] is that of a set of
institutional actors that, together, plays the major role in influencing innovative
performance.”). Indeed, the highly influential original “Yale survey” on innovation
embodied in 1987 the assumption that formal IP rights were but one among a series
of “appropriability mechanisms” through which private firms sought to recoup the
costs of their R&D investments. See Levin, Klevorick, Nelson and Winter, 1987.
Nelson deserves far more credit than he usually gets for thoroughly understanding
and forcefully arguing for the “contextual” view of IP at what now seems a very early
date. He is truly “Il miglior fabbro”, as T.S. Eliot said of Ezra Pound. For an
appreciation, see Dosi, 2006. Other early work by Edwin Mansfield also deserves to
be mentioned here. See Mansfield 1985, 1986, 1986 and Mansfield et al., 1977.

11 This particular topic is very well presented in Teece, 1986. Other survey-‐based
studies back this theory with empirical findings. See Cohen, Nelson and Walsh,
2000; Graham, Merges, Samuelson and Sichelman, 2010.

In second wave thinking, IP is just one of many ways firms make money by
creating new things. Formal IP rules are seen as embedded in a larger economic
context. This scholarship argues that only by understanding this larger context can
we understand the true impact of formal legal rules on “the rate and direction of
technological growth.” As mentioned, second wave thinking is in one sense simply a
return to the roots of the field. One of the earliest survey-‐based studies of IP rights
asked R&D managers to compare patents with other, non-‐legal “appropriability
mechanisms” – techniques for recouping investments in creative works. Perhaps not
surprisingly, many respondents listed lead-‐time advantage and trade secrecy as
more important than formal IP rights such as patents and copyrights.12

Second wave research has now returned to this basic theme. In this new line
of scholarship, contextualization is explored along a number of dimensions. In this
Chapter, I want to emphasize just three examples.13 Taken together, these give some
idea of the richness that follows from understanding IP as but one aspect of a much
broader innovative ecosystem in which creative firms and people operate.

First I will discuss what are known as IP’s “negative spaces”: trades and
pursuits in which participants rely on informal norms instead of formal legal
protection. These illustrate how IP rights are embedded in a larger system of social
norms, which some scholars say render formal IP redundant. Second I will turn to
the function of IP rights in “platform technologies,” for example These cell phone
standards and computer operating systems. Firms that own or dominate platforms
often use IP selectively to control access to their platforms. For these firms, IP is
embedded in a complex strategic game in which they seek profits through some
combination of technology platform and complementary products. IP can be used in
a number of ways in this game: to erect a toll for access to the platform; to
selectively exclude competitors from the platform while sharing access with allies;
or to enforce an open or nonproprietary platform model with other industry
participants. Third, I will discuss the growing literature that links IP rights to

12 Levin, Klevorick, Nelson and Winter, 1987, at 794.

13 Three of what could have been man examples, I should add. So for instance I cold
have added entire section on contemporary trademark scholarship, which has
shown that simplistic models of trademarks as a way to reduce consumer search
costs are incomplete because they ignore the sophisticated techniques of branding
experts and marketers. Thus Jeremy Sheff shows that investments in branding can
actually bias consumer’s perceptions about what they need or the characteristics of
a relevant product. See Sheff, 2011. And see Lemley and McKenna, 2012 (deploying
marketing literature to explore the complexities of brand loyalty, and its impact on
the actual economic effects of trademark law), and Lee, DeRosia and Christensen,
2009.


economic organization. Scholars have come to see that IP plays an important role in
the setting of firm boundaries, subtly affecting issues such as whether small, R&D-‐
intensive firms can survive independently or instead are fated to be absorbed into
large, vertically integrated companies. IP policy, from this perspective, helps
determine not only aggregate investments in creativity, but also the locus of
innovative activity: individuals, small firms, or large firms. It is a new and exciting
aspect of the overall trend toward greater contextualization in the economic study
of IP rights.

A. Case Study in Contextualization: Fields Where IP is “Unnecessary”, or, “IP’s
Negative Spaces”

In recent years, intellectual property (IP) scholars have described a number
of fascinating trades and pursuits where people get along quite well without the
protection of formal, enforceable IP rights. From French chefs (Fauchert and von
Hippel, 2008) to standup comics (Sprigman and Oliar, 2008), and from fashion
designers (Sprigman and Raustiala, 2006) to tattoo artists (Perzanowski, 2013) and
magicians (Loshin, 2010), creative people working in various industries develop
norms and practices that provide an adequate, and perhaps often superior,
alternative to formal IP protection.

Some have taken to calling these areas, collectively, IP’s “negative spaces.”
(Rosenblatt, 2011). From these studies, a consensus theory has begun to emerge,
which holds that IP law is far less necessary than many have traditionally supposed.
From a descriptive or positive beginning, in other words, negative space theory
often moves to a more normative point: the essential wrongheadedness of the
traditional story that IP rights are always and everywhere necessary to call forth
creative works. In terms of contextualization, then, negative space theory says at
times that IP policy needs to be sensitive to one important aspect of context: the
presence of norms that can act as “IP substitutes.”

1. How Big is the Negative Space?

One important point about negative space studies is that they tend to
concentrate on “niche” fields, industries and pursuits that are, in the aggregate,
relatively small when compared to the overall “IP economy” as a whole. Merges,
2013. So for example French restaurants, standup comedy and tattoo parlors are
relatively modest economic enterprises.14 Compared to the estimated size of the

14 An exception might be Schultz, 2006, who studies norms surrounding the copying
of recorded music concerts by fans of “jambands such as the Grateful Dead. It is not
clear how large this genre is as a percentage of all popular music, but it is clearly
substantial.


overall IP-‐based economy, they represent only a small percentage of activity. The
International Intellectual Property Protection Alliance (IIPPA), for example,
estimates that the “copyright industries” alone add $1 trillion to the U.S. economy
each year.15 It is very difficult to arrive at similar estimates for the “patent
industries” because companies in so many industries obtain large numbers of
patents every year. But we can say that the pharmaceutical industry is worth $ 340
billion per year alone,16 and that the chemical industry totals roughly $450 billion.17

Most of the fields that negative space theorists explore are in reality fairly
small-‐scale. They fit the description of property theorist Robert Ellickson (1993),
who some time ago noted that in “close-‐knit” groups, formal property rules were
often less efficient than an effective set of social norms.18 But, as Ellickson also
noted, once groups grow beyond a certain size, and the economic value of their
activities passes some threshold, informal norms cease to work. I believe this is as
true for IP as for conventional tangible property. So, while we may have some
interesting things to learn about context from IP’s negative spaces, the most
important lesson in the end may be that most industries, as they grow, end up
recapitulating the history of IP protection generally. As the larger context changes,
the negative spaces are filled in.

2. Changing Fashions?

But there is one industry studied by negative space theorists that is not
small-‐scale: fashion. A conservative estimate is that this is a $200 billion per year
field (Hemphill and Suk, 2009).19 Clearly this is an industry whose magnitude is

15 Figures such as these should always be taken with a grain of salt as they are (1)
based on large aggregate data sources, and (2) prepared by interest groups with a
string agenda. See L.A. Times, 2013.

16 Wikipedia, Pharmaceutical Industry.

17 www.Chemistryviews.org.

18 Ellickson, 1993, at 1520.

19 See Hemphill Suk, 2009, at 1148 n. 1:

U.S. apparel sales reached $196 billion in 2007. The U.S. Apparel Market
2007 Dresses Up ... Way Up, Bus. Wire, Mar. 18, 2008 (reporting estimate by
the NPD Group). Among fashion accessories, considering just one category,
handbags, adds another $5 billion in sales. Tanya Krim, There's Nothing
“Trivial” About the Pursuit of the Perfect Bag, Brandweek, Mar. 29, 2007
(reporting U.S. sales ex-‐ceeding $5 billion in 2005).


much closer to the “copyright industries” plus pharma/chemicals. So where does
fashion fit into discussions of the “negative space”? Perhaps the most important
point to note in this respect is that the fashion industry itself seems quite motivated
to escape the negative space. According to Scott Hemphill and Jeanie Suk (2009),

The adverse effects of copying explain why many [fashion] designers oppose
copying, just as they oppose counterfeiting of handbags. ([the negative space]
argument, if correct, ought to apply to fashion trade-‐marks and copyrights as
well.) [Raustiala and Sprigman] pitch their paradox as an explanation for the
otherwise puzzling equanimity with which designers greet copyists. But that
premise is faulty. In fact, many designers are vocal advocates against copying,
and . . . make use of the currently limited legal tools available to curb
copyists.20

In addition to enforcement using the established (though flawed) legal tools
available, fashion designers have been active in lobbying for various new forms of
design protection.21 This lobbying effort is perhaps the best indicator that
innovative firms are indeed not satisfied with the current copying-‐centric
equilibrium in the fashion industry. As a number of scholars have noted, in fact, the
speed and ease of copying have created a significant threat to the livelihoods of
creative fashion designers, making future lobbying more likely.22

Viewed from the perspective of the evolution of IP protection, the fashion
industry begins to look less like an instructive outlier and more like a very
conventional industry.23 As with many other industries, as the value of the creative
products increase the calls for strengthened IP protection increase as well. It may
not be long until fashion crosses the great divide from negative to positive IP space.

3. Learning About Context from Negative Spaces

From all this I think there are two things we can learn. First, there is indeed
room for IP-‐free zones – negative spaces in the fabric of IP protection. IP need not
permeate every crease and corner of the economy. Negative space theorists have
shown real creativity and resourcefulness in searching out and documenting

20 Hemphill and Suk, 2009, at 1183.

21 See, e.g., Eguchi, 2011, at 145: “A design protection bill from 2010] garnered
support from several well-‐known designers and the Council of Fashion Designers of
America (CFDA)— the creative core of the fashion industry . . . .”

22 See, e.g., Scafidi, 2008.

23 See Merges, 2001.

examples of fields that survive and even thrive outside the shadow of IP protection.
As with all empirical research, each case study adds to our understanding of how
our economy and society actually function, and the role of IP rights in different
economic contexts.

And yet, the other lesson from exploring negative spaces has to do with their
limits. Careful attention to context reveals that, in most cases, norms are effective
substitutes for IP rights primarily in niche industries where participants are
relatively close-‐knit socially. Out in the larger, more anonymous economy, it
remains to be seen whether norms can effectively replace the formal protection
provided by IP rights.

B. IP and Platform Technologies

When scholars study IP in context, IP becomes not the sole fulcrum
determining economic outcomes, but instead one of many interconnected facets of
economic activity. On one hand, this diminishes the significance of IP rights in the
analysis; they are not the exclusive determinant of investment, innovation, or
whatever dependent variable is affected by the existence or strength of IP
protection. On the other hand, this more contextualized understanding helps to
isolate the unique role that IP rights can play in a large, complex economic system.

An example from the world of platform technologies will show what I mean.
Platform technologies are technical systems such as computer hardware (e.g., the
Apple iPhone or Samsung Android cell phone handsets) or software (the Microsoft
Windows or LINUX operating systems). They provide a common starting point for
further technological development: the creation of special chipsets for the iPhone,
for instance, or a cell phone application designed for use with the Google Android
operating system software. Scholars have for some time understood the
economic/technological forces at work in these “platform markets” (e.g., Shapiro
and Varian, 1998). What is of interest to IP scholars is how firms in platform
markets use IP rights as strategic instruments. Some firms profit from proprietary
platforms which are covered by various IP rights. For them, exclusive IP rights
exclude direct competitors, obviously. But in the case of “allies,” companies that
develop complementary technologies or content that increase the overall value of
the platform “ecosystem,” IP rights are often purposely waived. See Simcoe, 2008;
Merges, 2008, 2011; Barnett, 2011b). So IP law permits a pattern of selective
enforcement and selective waiver that is used by sophisticated platform players to
advance their interests in this complex area.

Some platforms are “open,” rather than proprietary. IP plays a role in this
context too. Access to an open platform can be made conditional on agreement to
perpetuate the open access policy. This is achieved through licensing contracts
granting open source participants access to a platform. Licensees agree that in
exchange for obtaining access to an open source platform, their contributions will in

turn be subject to an open licensing policy. Thus – somewhat paradoxically – IP
rights are the foundation upon which open access is built. The IP rights that cover an
open platform are the basis for the legal threat that maintains open access.

The literature on IP and platforms treats platform access as a strategic
variable that can be manipulated by for-‐profit firms, those usually associated with
the strong IP rights/proprietary innovation model side of the IP debate. So open
innovation and profit maximization are no longer opposite ends of an ideological
spectrum; the former becomes a strategy pursued by private firms when conditions
warrant. This is true of for-‐profit companies permitting access to their platforms,
but in the case of private investment in open-‐source projects. In each case, firms
decide to strategically waive their property rights in the service of firm advantage.

We see here an illustration of the growing contextualization of IP rights in
the economic literature. Scholars have shown that they understand why the ability
to selectively waive IP rights is an essential dimension of their usefulness in the
context of platform competition. This is a far cry from a simple, unidimensional
“incentive” story where an increase in IP protection is tested for its effect on total
R&D investment. The effectiveness of IP rights in the platform environment depends
not only on the attributes of the IP rights when granted, but on the various licensing
and enforcement strategies employed by the holders of IP rights. By studying this
very special setting, economists have learned some new important lessons about the
effects of IP rights on firm strategy and overall welfare.

C. IP Rights, Firm Boundaries, and Economic Organization

Traditional first wave scholarship followed the conventions of classical
microeconomics in paying little attention to the organization of economic
production. IP rights influenced the overall production level in society; but it was
never mentioned which types of organizations did the producing. See, e.g.,
Nordhaus, 1969. In these early models, IP rights stimulate creative output (while
raising consumer prices), but the precise locus of that output is never mentioned:
individuals, small firms, large firms, etc. – this body of theory abstracts away from
these issues. But as with economics generally, IP economics has in later years
discovered the fascinating set of issues surrounding firm boundaries.24 This is one of
the clearest and most rewarding aspects of the general trend toward the
contextualization of IP rights.

24 Good syntheses of the literature include Burk and McDonnell, 2007; Barnett,
2011a. See also Heald, 2005; Bar-‐Gill and Parchomovsky, 2009; Virtinsky. Perhaps
the earliest reference to this theme in the legal literature is Merges, 1996 (arguing
that weak formal IP rights forced the Japanese software industry into a vertically
integrated production model that disfavored small, independent firms); but see
Mashima, 1996 (offering corrections to this thesis).


The basic insight from this literature is that IP rights can actually affect the
location of firm boundaries (Teece, 1986b). The key to this new understanding of IP
is to see it not primarily as something that affects overall incentive levels, but
instead as an instrument that affects transactions – and hence the organization of
production. Merges, 2005; Arora and Merges, 2004; Burk and McDonnell, 2007;
Barnett, 2011. Advocates of this view see IP as a way for small, specialized firms to
protect against opportunism when contracting with larger firms. IP makes it easier
for specialized firs to sell technology and know-‐how via arm’s length contracts,
which permits specialized producers to exist as independent firms. IP rights can
then be said to affect industry structure; without these rights, specialized
knowledge subject to opportunistic copying would have to be produced within
large, vertically integrated firms. This in turn would mean a loss of the “high
powered incentives” (to use Williamson’s term) available to independent firms who
sell their output via contracts. Merges, 2005. The upshot is that IP may, at the
margin, enable more small and independent firms to remain viable even in
industries where multi-‐component products are assembled and sold by large
vertically-‐integrated firms. This literature on IP and the boundaries of the firm thus
shows in very clear relief the importance of studying IP rights in context. Context
here is everything: IP rights and the nature of the firms that use them are
inextricably interlinked.

Another insight is that, by affecting the location of firm boundaries, IP may
exert an indirect incentive effect that has not been appreciated in the past. As
Barnett (2011a, at 787) puts it, in the case of patents: “Organizational effects proxy
for innovation effects: where patents alter organizational behavior, they alter
innovation behavior.” This is because the smaller firms enabled by stronger IP rights
may be more innovative, as compared to their large, vertically integrated
counterparts. Barnett (2004) and others make an additional point, which in some
sense brings this literature back around to one of the pioneer studies in the
contextualization of IP rights (Levin, Klevorick, Nelson and Winter, 1987): because
large firms have at their disposal numerous ways to recoup expensive R&D
investments (e.g., by bundling technology-‐intensive products with other products
over which the firm has pricing power), while small companies do not (due to the
absence of complementary assets), IP rights are particularly important for small
firms. The strength of IP rights, as a policy variable, affects small firms
disproportionately.25

25 While in general a society interested in maximizing social welfare would be
indifferent to whether large or small firms did most of the innovating, it has been
suggested that the enhanced autonomy which accompanies smaller firms provides
an independent social good (Merges, 2011a). Hence in some cases at least slightly
higher transaction costs ought to be tolerated for the sake of this independent social
good.


III. Methodological Diversity

The basic methodology of the first wave was comparative statics of one
variety or another. The classic version was a formal comparative model, showing
overall welfare with and without whichever feature of the IP system was being
modeled. See, e.g., Nordhaus, 1969. Even the early contributions, from what might
be called the primordial era of the first wave, employed this approach. (They used
analytic descriptions, or “word models,” instead of “formal” or mathematical
models; see, e.g., Plant, 1934.)

A. The Growth of Empirical Studies

The second wave is far more diverse. IP scholars now use all sorts of
methods. Chief among them in recent years has been the use of empirical data.
Beginning with some pathbreaking work in the late 1980s (e.g., Levin, Klevorick,
Nelson and Winter, 1987) and 1990s (e.g., Allison and Lemley, 1998), and
accelerating especially in recent years, empirical research has burgeoned so much
that it now has its own specialty abstracting service.26 Rarely does a week go by
without some new and interesting contribution looking at music sales, patent
prosecution, or trademark searches. Scholars are beginning to specialize; familiarity
with large datasets is now almost required in certain subfields of IP economics,
especially patent law.27 Some studies rely on traditional data sources, such as patent
citation studies. Others are based on novel, labor-‐intensive datasets the researchers
put together themselves. And more sophisticated statistical methods are broght to
bear, compared to the relatively simple early work. See, e.g., Ziedonis, 2004; Hall,
Jaffe and Trajtenberg, 2005; Galasso and Schankerman, 2010. Each study adds to the
growing integration of IP empirics into the main body of contemporary social
science.

A heightened sense of context is evident in the newer generation of empirical
work, following the general theme of recent IP scholarship. Early empirical studies
were highly aggregated, comparing for example GDP growth with patent grant rates.
Recent studies pursue a number of more sophisticated strategies, including a
comparison of how related patents for a single invention fare at three of the major
international patent offices, in Japan, Europe and the U.S. See Webster, Palangkaraya

26 Intellectual Property: Empirical Studies eJournal, from the Social Science
Research Network (SSRN), edited by Christopher Buccafusco and David Schwartz.
See SSRN.com.

27 See, e.g., Alcacer and Gittelman, 2006 (use of patent examiner data to study patent
examination patterns); Abrams, Akcigit and Popadak, 2013 (sophisticated study of
patents through citation data).


and Jensen, 2007. Another set of studies identifies variation in patent examiner
behavior, and the impact this has on patent outcomes such as validity
determinations in litigation. See, e.g., Cockburn, Kortum and Stern, 2003.

But empirical studies are just one of the methods second wave scholars put
to use. Structured interviews, experimental methods, and comparative institutional
approaches have also become popular in the past ten years or so. See Merges, 2000;
Vertinsky, 2012. These, together with the continued deployment of economic
modeling and analysis, represent important elements of the diversity of methods
that now characterize the field. And beyond economics, all manner of alternative
methodologies are in play as well. See, e.g., Merges, 2011; Dinwoodie, 2013.

In the sections that follow I describe what I see as the main thrust of several
of the most important methodologies being used in the IP field today. As with
everything in this Chapter, though I try to be comprehensive, the end result is no
doubt a personal and idiosyncratic survey of the literature.

B. Models and Analytics

Even while a host of newer methods have been brought to bear on IP-‐related
issues, scholars continue to use traditional approaches as well. For example,
economic modeling still plays an important part in the discussion of IP-‐related
issues. One rich source of modeling-‐based studies is the classic article, which a
contemporary scholar will explore anew with updated insights. In this genre,
consider for example Duffy, 2004 – a thorough reexamination of Edmund Kitch’s
classic “prospect theory” of patents, set out in Kitch (1977). Other recent work
considers different types of models, such as Yoo, 2004, which describes a product
differentiation view of copyright law. Still other work pushes classic insights a step
further, for example Lunney, 1996, who argues that it is allocative efficiency, and not
the classic “incentive-‐access tradeoff,” that ought to drive copyright policy. And an
excellent unified synthesis of the economics of IP and innovation is Scotchmer,
2006.

At the same time, IP has caught the attention of scholars whose interests lie
with theorizing about property rights generally. So for example, several important
articles by Henry Smith have pushed his highly analytic synthesis of property theory
into the domain of IP law. See Smith, 2007; Smith, 2009. So too with work by
scholars like Fennell, 2004 and 2009, and Merrill, 2009. In each case, IP provides
examples for an analytic approach to important issues in property law. The authors
integrate IP into the general fabric of property, using it for examples of a new way to
conceive or categorize some longstanding bodies of property theory. Merrill, for
example, argues that certain patent doctrines embody the property principle of
“accession,” or extension of ownership to natural outgrowths of previously-‐owned
works. And Fennell, 2009, points to interesting twists in IP inalienability rules in
support of her argument for a more flexible conception of alienability generally. Still
another area where general property theory overlaps with treatment of IP issues is

in the study of IP access regimes as a case study in governance of a common
resource. See Samuelson, 2003; Frischman Stranberg

C. Experimental Studies

A series of articles by Sprigman and Buccafusco describe experimental work
on IP rights. One demonstrates that a special version of the well-‐known endowment
effect28 exists with respect to works covered by IP rights. The article reports that
cognitive biases cause creators and owners of IP to set the price for IP considerably
higher than what buyers will, on average, be willing to pay. Sprigman and
Buccafusco, 2010. The research therefore suggests that IP transactions may occur at
suboptimal levels. They report that cognitive and affective biases are likely to be
more serious for transactions in works of relatively low commercial value, or for
which no well-‐established custom or pattern helps to inform valuation. The article
explores the implications their findings have for the structuring of IP rights, IP
formalities, IP licensing, and fair use.

In a related article, Sprigman and Buccafusco (2011) try to move beyond the
simple endowment effect story, to explore valuation issues when the seller of a
work covered by IP rights is also the original creator of that work. Not surprisingly
perhaps, they find an even stronger version of the endowment effect. They dub this
“the creativity effect.” In a cleverly structured series of experiments, they not only
confirm the existence of the endowment effect, they also show that when someone
creates a work he or she sets an even higher valuation on it than when an
owner/possessor considers selling it. That is, they separate creators from mere
owners. This is important in the IP field because IP rights are often justified by the
fact that they permit original creators to market their works, which supports
creative autonomy and also can enhance creators’ incomes. Their conclusion is that
markets for IP are systematically distorted by subjective bias.

The authors make some interesting points regarding policy implications. An
oft-‐discussed feature of IP law centers on the fact that large companies own the
rights to the creative works of their employees. In the usual discussion this is seen
as a problem, in that incentives to create are diluted by corporate ownership.
Sprigman’s results suggest that corporate ownership may not in fact be such a bad
thing. By removing the rights over IP-‐protected from the hands of individual
creators, aggregating ownership in the hands of large companies may in fact
facilitate more efficient IP markets.

The final paper tests the value of attribution (having one’s name attached to
one’s creative works) and publication (reaching an actual audience) in IP markets.

28 See “Endowment Effect,” Wikipedia,
http://en.wikipedia.org/wiki/Endowment_effect.


The findings here are based again on experiments involving subjects and carefully
constructed scenarios. He authors show that artists (in this case, photographers and
painters) place a very high value on having their names attached to their works.
This is established by a series of experimental trials in which some artists are given
the option of retaining attribution; the value of this right is determined by looking at
the price demanded by artists when they retain attribution and the price when they
do not. In other words the authors of the study have a methodology that allows
them to infer the value artists attach to attribution. The same is true of the value
they place on publication, which again is determined by looking at the price
differential under two conditions.

Despite its sophistication, this body of work remains somewhat ambiguous
as regards its policy implications. The most important issue here is implicit
baselines concerning the optimal rate of transactions. In Sprigman and Buccafusco,
2011, on the “creativity effect,” the authors argue that the valuations placed on
creative works by potential buyers and by non-‐creator “owners” (those who were
simply given a work created by someone else) are more reliable guides to the actual
market value of those creative works. This sets up the policy conclusion that
markets for IP-‐protected works are often inefficient because creators themselves
overvalue their works. But if intrinsic value is treated neutrally, then a different
conclusion might follow: many artists choose to retain sole ownership of their
works because, having created them, they are the highest-‐value owners on the
scene. From this perspective the issue is not “failed transactions,” but instead the
importance of intrinsic valuation when it comes to creative works. In a related vein,
it might be that the studies here show aggregate tendencies. But this does not drive
a strong policy conclusion, because all it takes is for some outliers – some “creative
professionals” whose subjective valuation is closer to that of buyers – to make a
market. Under this interpretation, high valuation creators will remain outside the
market but low valuing creators will enter it. This could in turn drive a sort of
“reverse market for lemons” dynamic. High-‐valuers will be driven out of the market,
because they can’t sell their works at market-‐clearing prices. And low-‐valuers will
come to predominate. If this became a trend, it would undermine the notion that
disparate valuation makes IP markets too “thin.”

Another line of research, conducted primarily by experimental psychologists,
eschews large-‐bore policy prescriptions while testing what might be called the
development of intuitions regarding IP rights. The chief characteristic of these
studies is that they take insights from cognitive psychology and test their relevance
to IP-‐specific scenarios. Some study the development of children’s intuitions about
ownership, Fasig, 2000; Friedman and Neary, 2008; Neary and Friedman, 2013.
Others show that children have an intuitive appreciation for the value of labor in
justifying ownership, Kangiesser and Hood, 2013.

A fascinating branch of this field with special relevance to IP studies
developmental cognition, testing whether children have any sense of idea
ownership and if so at what age. So for example cognitive scientists have shown that

children as young as 6 years old apply simple rules of ownership and possession to
ideas as well as to physical objects. Shaw, Li and Olson, 2012. The authors conclude
that “children do apply principles of ownership to ideas as well as objects.” (At
1398.) In addition, it is noteworthy that even children this age have a sense that
some ideas are inherently common property; they will not apply ownership
concepts and rules to a common word, for example. Id., at 1398 (“[C]hildren and
adults used first possession for determining ownership of ideas, but not words.”). It
is also worth noting that, according to another set of studies, children begin to
recognize and censure plagiarism between the ages of 4 and 6. See Olson and Shaw,
2011.

There is room here for much more nuance. A critical issue, for example, is
whether children’s intuitions about idea ownership are, as some researchers
suggest, culture-‐specific. If so, the studies are noteworthy in showing cultural
influences over moral intuitions at a very early age. If not, they support a more
universalistic claim: that IP rights are rooted in moral intuitions that develop early
in the human mind. In any event it is safe to say that there are a good number of
fascinating questions left to explore in this area, and that experimental studies of P
law may continue to enlighten the field for some time to come.

IV. Conclusion

I have emphasized two major trends in the economics of IP rights: An
increased sense of IP in context, and the growth of methodological diversity. Taken
together, they have the field poised for deeper insights and greater policy relevance
than ever before.

By studying how IP works in various contexts, scholars have progressed
significantly from the stylized, simplistic models of the past. Each study is distinct,
taking as its starting point a specific economic setting. But taken together they
reveal the many diverse ways IP rights exert an influence on economic behavior.
The contrast with older scholarship is striking: contextual studies begin not with
simple models but with real-‐world industries and practices, and ask how IP rights
play into various features of the setting under study. The payoff is a much better
understanding of the distinct contribution IP rights make to economic life. Though a
unified view of these rights (e.g., as simple incentives; or as economic monopolies) is
of course sacrificed, they reveal a multifaceted reality that is infinitely more varied
and interesting than the simple world view of the old models.

In one sense, the benefits of methodological diversity are even more self-‐
evident. Each approach, indeed each individual study, has something to teach us
about IP rights. An empirical study of variability among patent examiners, for
example, might lead to a call for better Patent Office quality control. Or it might
simply push private actors to diversify their patent filings among different
examining groups. Better ways of grouping and organizing doctrines might

stimulate new thoughts on core features of IP systems. The advantages are as
diverse as the methods and studies themselves.

But a more significant payoff comes when multiple methodologies reach the
same conclusion. Convergence of this sort sends a powerful message. We can more
confidently argue for policy prescriptions when multiple scholars, using different
tools, arrive at the same conclusion. So for example, when economic modeling,
ethnographic interviews, and large-‐scale event studies all indicate that extending
the term of copyright protection adds nothing to creators’ incentives, we can be
confident in advocating against further increases in the length of copyright. At the
very least, consensus on this scale can help reveal the naked power of lobbying
groups; a policy proposal that is opposed by all serious scholars, but which gains
political traction nonetheless, teaches just how completely legislative muscle can
trump objective policy analysis.

Methodological diversity is actually essential if we are to have real
confidence in our policy positions. As with the natural sciences, a successful strategy
for understanding complex issues such as the place of IP rights requires two distinct
phases. The first is highly reductionist: a small feature of the complex system is
isolated and studied in great depth. Then, when many such reductionist studies are
available, the disparate results are sifted and collected into a new synthesis. In this
second phase the disparate pieces are reassembled into a comprehensive new
understanding. This new synthesis can be robust precisely because it is built on
many solid, discrete studies. Real confidence comes when we can see the overall
pattern that emerges from this diversity of building block studies. To reach this
point in the study of IP rights, we will need many more diverse studies of discrete
phenomena. But as these pile up, we will arrive at new syntheses that provide a
firmer foundation for policy than the field has ever known.

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Electronic copy available at: https://ssrn.com/abstract=2412251

Electronic copy available at: https://ssrn.com/abstract=2412251

Electronic copy available at: https://ssrn.com/abstract=2412251

Electronic copy available at: https://ssrn.com/abstract=2412251

Electronic copy available at: https://ssrn.com/abstract=2412251

Electronic copy available at: https://ssrn.com/abstract=2412251

Electronic copy available at: https://ssrn.com/abstract=2412251

Electronic copy available at: https://ssrn.com/abstract=2412251

Electronic copy available at: https://ssrn.com/abstract=2412251

Electronic copy available at: https://ssrn.com/abstract=2412251

Electronic copy available at: https://ssrn.com/abstract=2412251

Electronic copy available at: https://ssrn.com/abstract=2412251

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