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Market Failure and Government Intervention

Treating an invention as a trade secret is a ready alternative to patenting.  In this case, the inventor simply tells no one how his invention is made.  Trade secret laws protect inventors from having someone else steal their idea. However, they are not protected if someone "invents" the same product.  

Nevertheless, patents are widely used and generally do provide some protection to the inventor.  In fact historically a wide number of strategies for using patents have evolved:

(1)  Patents can foreclose markets.  If a firm can accumulate enough patents around a particular area of invention and specify them broadly enough to prevent inventions in the area,  they may be able to push competitors away from inventing in the area.  Anyone wishing to invent in the area must "invent around" existing patents.  

When considering a patent, a major question is whether to write the patent application as a "sword" or as a "shield".  If written as a sword, the language employed for the application is broad so that other inventors may be taken to court for producing overselling competitive products which appear even remotely related.  On the other hand, written as a shield, the patent is written very specifically and narrowly.  The shield provides protection from suits brought by those with swords.5

(2)  To circumvent patents, firms may invest a great deal of money to invent around existing patents. Such a tactic has been used in the Pharmaceutical markets.

(3)  Firms can intimidate other firms by showering patent applications on the government.  Because of lags in granting patents, a large number of patent applications in an area can cause great uncertainty to inventors and steer them away from inventing in the area.  Such intimidation seems to be occurring today in biotechnology and superconductors.

(4)Patents may sometimes be used to prevent threatening inventions from coming to market through innovation.  Innovation is required to bring a good from an invention to a marketable product.  However, a firm may obtain a patent on an invention and may simply decide to sit on it.  At that point, the patent serves as a way of denying the invention to the market place.

(5)  Patents do bestow monopolies upon firms and this means that society experiences all of the inefficiency associated with restrained production and high prices.  Such a problem is lessened by limiting for how long patents will be granted which has traditionally been a seventeen year period.

Unfortunately these strategies do not necessarily mean that patents represent true inventive effort and that they are used to stimulate efficiency in the marketplace.

To break such dysfunctional use of patents, firms can cross license patents.  Cross licensing allows firms to share each other's patents.  For example, in the semiconductor market, the government went one step further.  It allowed the creation of organizations like Sematech that should spur inventions which would lead to patents.  These patents were shared among American producers.  The problem with such government involvement is that it may remove some of the

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