Monday, April 23, 2007

Flip A Coin?

Michael Kremer has an interesting idea for how to fix the patent system. Essentially, he wants the government to purchase patents for a fair market price. How to determine "fair market price"?

The sticking point is determining that "fair market price". But Kremer has solved that problem: First we grant the patent. Then we auction the patent to the highest bidder. As soon as the auction ends, the man from the government arrives and flips a coin. If the coin comes up heads, the auction winner completes his purchase; if it comes up tails, the government buys the patent for the amount of the winning bid. Bidders have every incentive to bid judiciously because the coin sometimes comes up heads. But this way, half of all patents end up in the public domain, which is halfway toward solving the problem.
Kremer's solution to the problem reminds me of similar methods in math/CS (especially w.r.t. crypto). In the math/CS world you work backwards from the desired behavior towards an algorithm which generates that behavior; if you have to do something like introduce a random variable (again, lots of this in crypto algorithms) to make things behave correctly you just go ahead and do it. This appears to be the approach that Kremer has taken, working backwards from a desired result to the procedure.

This is a perfectly valid approach in the domain of mathematics, but I'm not convinced that its legitimate in the domain of law/public policy. Obviously you have to know what solution you're aiming for in order to formulate a policy, but at the same time you have to be able to derive you policy from existing principles i.e. you're working forwards rather than backwards. Normally this isn't a big issue, but I'm not sure that the coin flipping can be supported working forward from first principles.

Really, the question to ask here is whether randomly allocating patents to the public domain is a proper function of government? Kramer's approach necessitates that the government purchase these patents, which he claims will lead to collective savings:

We pay through the tax system only what the inventor would have extracted from us anyway, and we get the additional benefits of competition: more mousetraps are built, and more inventors can start piggybacking on the idea.
I disagree; its not a forgone conclusion that there will be savings at either the collective or individual levels.

There's no logical connection between the price paid at auction for a patent and the price the consumer pays if that patent grants a monopoly. Consider, as a contemporary example, the Zune and the iPod. These are mutually substitutable goods, but are covered by a different set of patents. If company X's monopoly on one patent imposes a "patent tax" that increases the price of their MP3 player consumers can switch to company Y's product, thus avoiding the patent tax. But, if the government purchases company X's patent, everyone must pay some part of the cost of purchasing that patent through taxes. Its not apparent that consumers would save collectively in this situation.

There's also the notoriously difficult proposition of placing a value on intellectual property. A public auction establishes, by definition, the "fair market value" of a patent, but the fair market value of a patent doesn't have any direct correlation to the eventual cost to consumers. Its quite possible that a company could be granted a patent that has a high market value but then implement the production and marketing of that patent in such a way that consumers actually end up paying a negligible amount of patent tax. For example, consider the XBox, a device chock full of patents. MS marketed the XBox as a loss leader; its not clear that the price would have been any lower had Microsoft not had a monopoly on some of those patents. Or the auction could take on a speculative character, with people bidding up a "promising" patent. Again, if the government ponies up for a patent which eventually turns out to be useless the taxpayer has ended up spending more than they would have otherwise. You can argue that an efficient market calculates all of these eventualities into the price of a patent, but I've got two words for you: "irrational exuberance".

Consider also the case of the individual. Individuals pay different amount of patent tax based upon their buying patterns. I buy a lot of books and few electronic gadgets; presumably I pay much less patent tax than a person who buys lots of gadgets and few books. If the government starts buying up the majority of patents some of the gadget-buyer's tax shifts to me, while a portion of my tax shifts to em. In the end I end up worse of and ey ends up better off.

And these are just critiques of potential outcomes; I haven't even touched on the question of whether capricious government action is appropriate. Randomly allowing only some patents to be purchased by private parties seems off to me; does the ability to grant patents also give the government say over their disposition? I'll go no further than that, because that's a legal question that I'm not qualified to answer.

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