1、Econ 522Economics of LawDan QuintFall 2011Lecture 71w Established properties of an efficient property law systemwPrivate goods are privately owned,public goods are notwOwners have maximum liberty over how they use their propertywInjunctive relief used when transaction costs are low,damages used when
2、 transaction costs highw We tried“testing Coase”through an experimentwCan UW undergrads reallocate poker chips efficiently?w(Cost me$124)Monday2w Take 1:Full Information(values on nametags)Our experiment26/28=93%586032purple chip2purple chip4purple chip4(sorry)6purple chip6purple chippurple chip8pur
3、ple chippurple chipred chip8purple chippurple chip10purple chippurple chip10red chipred chip12fraction of potential gains realizedactual final allocationefficientallocationstartingallocation3w Take 2:Private Information(values hidden)Our experiment18/24=75%424824purple chip2purple chip3purple chip34
4、purple chippurple chip4red chippurple chip6purple chipred chip6purple chippurple chip8purple chippurple chip8purple chipred chip10fraction of potential gains realizedactual final allocationefficientallocationstartingallocation4w Take 3:Uncertainty w Take 4:Adverse SelectionOur experiment100%12128chi
5、p2 X die roll(actually 8)chipchip3 X die roll(actually 12)fraction of potential gains realizedactual finalallocationefficientallocationstartingallocation0%121812chip2 X die roll(actually 12)chipchip3 X die roll(actually 18)fraction of potential gains realizedactual finalallocationefficientallocation
6、startingallocation5w Coase works pretty well,except under asymmetric infowFull info:93%of gains achievedwPrivate info:75%wUncertainty:100%wAsymmetric info:0%w Comparing“uncertainty”to“asymmetric info”wSellers value was 2 X die roll,buyers value was 3 X die rollwIf nobody knows die roll,no problem th
7、ey can trade based on the expected valuewBut if seller knows die roll,problemwIn strategic settings,information can have negative value the seller could be worse off for having information!Conclusion6(old exam question,question by Alex Tabarrok at Marginal Revolution blog)In Virginia,the common law
8、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 your 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-ol
9、d 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 the Coase Theorem say about the two rules?Discussion question7Applications ofProperty Law8w Intellectual property:broad term for ways that an individual,or
10、a firm,can claim ownership of informationwPatents cover products,commercial processeswCopyrights written ideas(books,music,computer programs)wTrademarks brand names,logoswTrade SecretsIntellectual Property9w Example:new drugw Requires investment of$1,000 to discoverw Monopoly profits would be$2,500w
11、 Once drug has been discovered,another firm could also begin to sell itw Duopoly profits would be$450 eachInformation:costly to generate,easy to imitateup-front investment:1,000monopoly profits:2,500duopoly profits:450 each10w Solve the game by backward induction:wSubgame perfect equilibrium:firm 2
12、plays Imitate,firm 1 playsDont Innovate,drug is never discoveredw(Both firms earn 0 profits,consumers dont get the drug)Information:costly to generate,easy to imitateFIRM 1(innovator)InnovateDontFIRM 2(imitator)ImitateDont(-550,450)(1500,0)(0,0)up-front investment:1,000monopoly profits:2,500duopoly
13、profits:450 each11w Patent:legal monopolywOther firms prohibited from imitating Firm 1s discoveryw Subgame perfect equilibrium:firm 2 does not imitate;firm 1 innovates,drug gets developedPatents:one way to solvethe problemFIRM 1(innovator)InnovateDontFIRM 2(imitator)ImitateDont(-550,450)(1500,0)(0,0
14、)up-front investment:1,000monopoly profits:2,500duopoly profits:450 each450 P12Comparing the two outcomesFIRM 1(innovator)InnovateDontFIRM 2(imitator)ImitateDont(-550,450)(1500,0)(0,0)up-front investment:1,000monopoly profits:2,500duopoly profits:450 eachFIRM 1(innovator)InnovateDontFIRM 2(imitator)
15、ImitateDont(-550,450 P)(1500,0)(0,0)Without patents:wDrug never discoveredw With patents:wDrug gets discoveredwBut13w Without patents,inefficient outcome:drug not developedw With patents,different inefficiency:monopoly!w Once the drug has been found,the original incentive problem is solved,but the n
16、ew inefficiency remainsPatents solve one inefficiencyby introducing anotherCS1,250Profit2,500P=50P=100 QQ=50DWL1,250CS4,050Profit 450 x 2P=10Q=90DWL50MonopolyDuopolyup-front investment:1,000monopoly profits:2,500duopoly profits:450 eachNet Surplus=2,750Net Surplus=3,95014w First U.S.patent law passe
17、d in 1790w Patents currently last 20 years from date of applicationw For a patent application to be approved,invention must be:wnovel(new)wnon-obviouswhave practical utility(basically,be commercializable)w Patentholder whose patent has been infringed can sue for both damages and an injunction agains
18、t future violationsw Patents are property can be sold or licensed to othersPatents:a bit of history15w Narrow patents might allow us each to patent own inventionw Broad patents might notw“Winner-take-all”race to be firstPatent breadth16w Does a patent on the“pioneering invention”cover the applicatio
19、n as well?w Can you patent an improvement to an existing product?Patent breadth17w Patent lengthwNeed to last long enough for firms to recover up-front investmentwBut the longer patents last,the longer we have DWL from monopolyw(Example from textbook:drug price drops from$15 to$1 per pill when paten
20、t expires)wTradeoff between ex-post inefficiency and ex-ante incentive provisionw U.S.:all patents last 20 yearswJeff Bezos(founder of Amazon)once suggested software patents should last just 3 yearswGermany:full-term patents for major inventions,3 year“petty patents”for minor ones,annual renewal fee
21、sPatent length18w Coase:without transaction costs,initial allocation of rights irrelevant for efficiencyw But transaction costs may be highwUncertainty on whether a patent is validwUncertainty of outcome of researchwMany partiesDo the details matter?19w Coase:without transaction costs,initial alloca
22、tion of rights irrelevant for efficiencyw But transaction costs may be highwUncertainty on whether a patent is validwUncertainty of outcome of researchwMany partiesDo the details matter?20w Coase:without transaction costs,initial allocation of rights irrelevant for efficiencyw But transaction costs
23、may be highwUncertainty on whether a patent is validwUncertainty of outcome of researchwMany partiesDo the details matter?21w government purchase of drug patentsw prizeswGoogle$30 million prize for landing a rover on the moonw direct government funding of researchw25%of research spending in U.S.is f
24、unded by governmentAlternatives to patents for encouraging innovation22patentscopyrightstrademarkstrade secrets23w Property rights over original expressionswwriting,music,other artistic creationsw Creations like this tend to fit definition of public goodswnonrivalrouswnonexcludablewso private supply
25、 would lead to undersupplyw Several possible solutionswgovernment subsidieswcharitable donationswlegal rights to creations copyrightsCopyright24w Copyright law less rigid than patent lawwUnlike patent law,allows for certain exceptionsw Copyrights last much longer than patentswCurrent U.S.law:copyrig
26、ht expires 70 years after creators deathw No application processwCopyright law automatically applies to anything youve written/createdw Copyrights more narrow than patentswCover exact text,not general ideaCopyright25w Retelling of Gone With The Wind,from point of view of a slave on Scarletts plantat
27、ion,published in 2001wMargaret Mitchells estate sued to halt publicationwEventually settled out of courtwWas there really any harm?Copyright26w Retelling of Gone With The Wind,from point of view of a slave on Scarletts plantation,published in 2001wMargaret Mitchells estate sued to halt publicationwE
28、ventually settled out of courtwWas there really any harm?Copyright27patentscopyrightstrademarkstrade secrets28Trademarksw Reduce confusion over who made a productw Allow companies to build reputation for qualityw Dont expire,unless abandonedw Generic names cant be trademarked29Trademarks examplew WS
29、J article 9/17/2010:“Lars Johnson Has Goats On His Roof and a Stable of Lawyers To Prove It”wRestaurant in Sister Bay WI putgoats on roof to attract customersw“The restaurant is one of the top-grossing in Wisconsin,and Im sure the goats have helped.”wSuing restaurant in Georgiaw“Defendant has willfu
30、lly continuedto offer food services from buildings with goats on the roof”http:/ dilution31patentscopyrightstrademarkstrade secrets32w Protection against misappropriationw But plaintiff must showwValid trade secretwAcquired illegallywReasonable steps taken to protect itTrade Secrets33patentscopyrightstrademarkstrade secrets
