The economics of intellectual property rights

Intellectual property laws were created with strong economic justifications to back them up. What is the economic reasoning behind patents and trademarks?

What is the economic justification behind intellectual property law?

Intellectual property law is built on a foundation of economic thinking. At first glance, it's plausible to think economies might be more innovative and efficient if every idea was free for all to use; dig a little deeper, however, and it becomes clear this is not the case. Intellectual property law is designed to balance the private and public good that comes from new ideas, in a way that incentivises private innovation while giving society the benefits of new knowledge.

Trademarks and patents are two legal instruments with strong economic justifications. What are they?

Trademarks help consumers find their brand of choice

The economic reasoning behind trademarks is related to the costs and benefits of building a business reputation. When a consumer has a favourite product, they want to be able to find it every time they desire to purchase it. What allows this to occur in our modern economies is branding. The customer is able to recognise the logo, name of the company and the graphic design of the product and knows that it's the product they like.

The brand and the reputation of the company gives consumers valuable information about the products they are choosing between.

In economic terms, the result of this branding is a reduction in the search costs of consumers. Instead of having to search for a product they like every time they go to make a purchase, they can rely on the reputation companies have built through their brand. When they go to a store, they can see a multitude of different products, all with different branding and yet have some idea about the quality of those products, even if they've never tried them before. With branding, you can be aware that one company's products are high quality, whereas another's are shoddy, all without necessarily having to buy and try the products themselves – the brand and the reputation of the company, good or bad, gives consumers valuable information about the products they are choosing between.

However, this branding needs protection, and it gets it in the form of trademarks. If companies weren't able to stop other parties using their logo, name and distinctive visual features, infringing parties would simply be able to copy them and mislead consumers into buying their product instead of the actual company's. When businesses are allowed a free ride on the good reputation another company has built, both consumers and the businesses suffer. Who is going to make the investment into building a brand if they know someone else can just copy it as soon as they've become successful? With a trademark, a business can be confident that the good relationship they build with their customers will not be abused by others trying to free ride on their efforts.

Trademarks help consumers find the products they know and trust.Trademarks help consumers find the products they know and trust.

Patents give inventions a chance

If you had a choice to invest money into pre-existing assets or take the risk of trying to develop something new, knowing that someone else could just copy you once you've done the work, what would you do? In many cases, the former is a much safer option for generating a return, because the risk that all your investment into innovation will be for naught is too high. Innovation is expensive. Without the knowledge that they can profit from any discoveries made, companies would not be willing to invest the millions, sometimes billions, of dollars into R&D, trials and manufacturing. This is the scenario patents were invented to avoid. 

Patents allow people to develop their ideas and sell them on the open marketplace without fear of having their invention stolen. In effect, it's a guarantee from society that says "if you put the time, effort and resources into developing or discovering something new, you have the right to solely benefit from that for a period of time."

The effects of this privatisation of benefits have a broader impact on the entire industry. All firms understand that in order to get ahead and to have the next big thing, they need to innovate. If you're not innovating, you're not standing still – you're going backwards. One technological leap ahead from a competitor could put your entire business in jeopardy, even though nothing about the fundamentals of your business has changed – it's just that something better has come along.

For new ideas to be developed, the protection of patents is often needed.For new ideas to be developed, the protection of patents is often needed.

Over time, this arms race of innovation benefits the industry as a whole. The deal for having a patent granted is that you make information about your invention public knowledge. This results in a slow broadening of valuable information that's available to all, but has been financed and developed with private investment. Without patents, firms would be incentivised to keep all their new knowledge to themselves (as some still do in the form of trade secrets). The result of such a system would be far less innovation, because firms couldn't build on the advances others in their space have made.

The team at Alder IP have a great deal of experience in intellectual property and commercial law.  To learn more about how we can help your business and its intellectual property thrive, get in touch today.