Patents are the Foundation of the Market for Inventions

The anti-patent storm, setting aside political and business interests, reflects a basic misunderstanding of the purpose of the patent system. The standard view – that patents provide “rewards” for inventors – does not accurately describe public and private institutions, is based on incorrect economic analysis, and is highly misleading for public policy. In this paper, I argue instead that patents provide the foundation of the market for inventions. I develop a comprehensive economic framework for the study of patents that extends work I have done on market microstructure, the theory of the firm, and innovation. I then show that the market foundation role of patents has important implications for antitrust and public policy towards intellectual property (IP). I suggest that a better understanding of the market foundation role of patents may help calm the anti-patent storm.

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