Achieving the optimal power of patent rights

This article examines how policy instruments governing the grant and enforcement of patent rights affect the ex ante incentive to invest in inventive activity. In order to encourage investment into the creation of an asset, capitalism extends to firms and individuals the right to appropriate the returns from owning that asset. Preventing theft, and accordingly, the expropriation of one's profits, hinges on being able to define the asset. For tangible assets, this mechanism is certain since the boundaries around what are (and are not) part of the asset can be precisely articulated and title to the ownership is mostly complete. However, this is not the case for intangible assets such as intellectual property because the boundary between a new asset and existing ones is often ambiguous when expressed in written form. From a welfare perspective, granting patent rights gives rise to a further issue. Unlike property rights over tangible assets, patents create deadweight social losses by temporarily blocking imitation and preventing others from using a non-rivalrous resource. These deadweight losses arise because the patent system operates by creating a distortion (a monopoly right) to correct a distortion. Given the existence of legislation enshrining patent owners' rights, the power of a patent is determined in two stages: first, acquiring the title to the right (patent granting) and, second, getting competitors to accede to the right by modifying their behavior (patent enforcement). These two stages occur over a continuum of administrative, legal and quasi-legal activities including drafting the patent application, examining (and opposing) the application at the patent office, and enforcing the patent