Why Intellectual Property Rights Matter – A Reminder

Why Intellectual Property Rights Matter – A Reminder

Andreas Freytag and Gernot Pehnelt

... On the other hand, IPR protection legally enforces (temporary) monopolies where a market for the innovation exists and no relevant substitutes are available (9). Such a monopoly that – quasi by nature – result in short-term dead weight welfare losses and static inefficiencies. As Nordhaus (1969) shows, in a closed economy, an optimal IPR-system would equal the marginal dynamic benefits of innovations with the marginal static efficiency loss stemming from reduced competition. An IPR-system that satisfies this requirement balances static and dynamic efficiency and maximizes the welfare within a society by creating incentives to innovate on the one hand and ensuring sufficient competitive pressure on the other hand. However, it is not a trivial task to calculate static welfare losses that might result from the monopolistic power provided by IPR protection and it is literally impossible to estimate potential benefits of (future) innovations. That is why neither economic theory nor policy has reached a clear consensus on what an ideal IPR system should look like, especially when it comes to international trade. ...