The Effect of Patent Length on Social Welfare: The Economics of Modifying Patent Life as a Policy Instrument

Abstract

This paper will explore the contemporary applicability of an economic model of patents. It will proceed to then analyze the implications of the model’s findings on scholarly understanding of the contemporary patent system. The model views a patent as conferring a period of exclusivity during which the patentee can reap the producer surplus due to monopoly pricing. Upon expiration of the patent and thus the elimination of the deadweight loss characteristic of the patentee’s monopoly pricing during the term, the surplus becomes entirely the consumer’s. The model treats the problem as one of optimization, balancing the force of the patentee’s profit motive and desire to seek adequate recompense for its initial cash outlay to come up with the invention (i.e. a desire for a longer patent term), with the push of the government’s desire to reduce the deadweight loss and allow other market entrants (i.e. a shorter patent term). My updates to the model demonstrates that contemporary discount rates will not affect the basic findings that welfare is not too dependent on patent length. In addition, the findings still have policy-setting applicability in light of the existence of patent thickets. If the government were to aim to decrease thickets, then shortening patent life would be an effective tool, as overall societal welfare would be minimally impacted. The paper also demonstrates that shortening or tweaking patent life also has the ability to stem the effects of the activity of non-practicing entities (NPEs), commonly known as “patent trolls.”