STEVE LOHR gee-whizes in an aint-it-grand tone, about the wonders of an auction market in patents link here. He has several examples of inventors who can market ideas to others who develop, manufacture, and sell the product--after paying the patent holder a goodly licensing fee. His examples all involve patents with questionable justification. Are they really new innovations or obvious applications of ideas that have already been developed? Is a phone with a preprogrammed emergency number and a GPS truly innovative or an obvious variant for something which is already patented by someone else.

What Lohr fails to mention is that a patent is a government granted monopoly, constitutionally granted for the purpose of encouraging innovation. We are now into encouraging trade in legally granted but questionably innovative patents, as if that justifies the original grant.

"Wrangling over patents is beginning to move out of the courtroom and into the marketplace," he writes. "A flurry of new companies and investment groups has sprung up to buy, sell, broker, license and auction patents. And venture capital and private equity is starting to pour into the field." If you look at the court records, there is no let up in court wrangling--rather there is more than ever. Indeed, patent suits have become the great Relief for Lawyers Act.

Another example Lohr cites is a company with cell phone patents. The company has made a good deal of money from licensing but has not gone after the large companies who are presumed to have infringed their patents. Instead one may assume they will just get along by selling licenses on an exchange, with the implicit threat of suing little guys who usually find it advantageous to pay off rather than fight the case in court. Be safe, not sorry.

We've seen this before. They are called patent trolls.

The concept of a patent auction is an improvement, because it can help betray the social cost of a monopoly.

One can then soon migrate from patent holders auctioning off their patents, to the state auctioning off monopolies directly. They can then be recognised as auctions of the public's inalienable liberty instead of magically cost-free prizes of beneficence conjured out of thin air.

If corporations pay the people for monopolies (the suspension of their liberty), the people can at least notionally then turn round and say "Well, now hang on, actually we don't think that's a particularly good offer. We'll keep our liberty thanks."

After all, if the people's liberty is so valuable, why the heck aren't the people able to keep hold of what's not only very valuable to them, but also what's naturally theirs by right?

We could move to a system in which patents weren't simply granted gratis, but were obliged to go through a public auction process to ensure the public had at least some financial return on the dispensation of their liberty. The people get 90% of the sale price, with the patent filer getting 10%. If the patent doesn't reach a reserve price of $10,000 then it's plainly not worth granting and cluttering up the archives with, but at least it's then certified as published and non-patentable prior art.

The point is to highlight the fact that the monopoly of a patent costs society - by demonstrating that many of the patents currently given away have a very high market value - produced entirely at the cost of the people's liberty. It'll be clearer that people are losing something when they are paid so handsomely for it - for what they've been led to believe is of no consequence.

Of course, it would all be so much more ethical and efficient if patents were simply abolished, but it seems we have to reach that conclusion via ever more ridiculous situations - until even politicians can figure it out (or rather, can no longer pretend to be unable to figure it out).

This article advances the lie that a patent is a monopoly. A patent gives the holder the right to exclude others from making, using or selling the invention. 35 USC 154. It does not give the holder the right to make, use or sell their invention. A monopoly is an exclusive right to a market, such as an electric utility company. An electric utility company has the exclusive right to sell electricity in a certain territory. Since a patent does not even given the holder the right to sell their invention, let alone an exclusive right to a market, it is clearly not a monopoly.

When a person describes a patent as a monopoly to be consistent they should also state that they have a monopoly over their car or over their house. In fact, they have more rights in their car and house than a patent gives the inventor over their invention, since you have a right to use and sell your car or house. A patent does not give these rights to an inventor over his invention. All invention are built upon existing elements (conservation of matter) and if the elements that the invention uses are patented, then the inventor will not have the right to sell their invention without a license.

Some economists argue that a patent is designed to give the holder monopoly power. Those economists who are consistent also state that all property rights give some monopoly power. The property rights are monopolies thesis shows how confused economic thought is on this subject. The only logically consistent definition of a monopoly is an exclusive right to a market.

People who suggest a patent is a monopoly are not being intellectually honest and perpetuating a myth to advance a political agenda.

Terrible proposition. The concept of "patents" has been bastardized to the point that abstract concepts are now being patented. Where is the clear property line?

I liked the example, by another person, of the oscillating sprinkler. Are we going to patent, as a concept, all oscillating sprinklers or will we have an infinite number of patents based on vertical versus horizontal sprinkling and/or the time interval?

People by penny stocks hoping that something "big" will happen. I can see something similar with a patent market, penny patents bought by the bushel hoping that they can can be used to extort some revenue.

Dale B. Halling writes:

This article advances the lie that a patent is a monopoly.

The article makes no such claim; indeed, it doesn't mention the M word. On the contrary, it states that patent auctions are a price discovery market mechanism to determine the value of patents, which is at the opposite end of the free market-monopoly spectrum:

The arrival of these new business-minded players, according to patent experts and economists, could lead to a robust marketplace for patents, where value is determined not so much by court judgments but by buyers and sellers, perhaps, someday, like eBay.

Having said this, we should note that auctions were used to determine the value of slaves too, with a slave's price being determined by the highest bidder. That doesn't mean that slavery was a free market institution, even if auctions were.

A patent is a monopoly, contrary to your assertion that it isn't. If I produce an invention and patent it, while my patent doesn't give me the right to produce it or give me the right to an exclusive market, by preventing other would-be inventors from producing the same invention, it does give me an opportunity to earn monopoly rents, which is tantamount to the same thing in the most relevant economic sense. After all, if the government gave me an exclusive market in, say, making and selling pizzas, if I were an incompetent pizza supplier (don't ask, but bring a bottle of Pepto Bismol), than I probably wouldn't earn those rents. Many patentees no doubt never earn as much as their patent filing fee.

When a person describes a patent as a monopoly to be consistent they should also state that they have a monopoly over their car or over their house. In fact, they have more rights in their car and house than a patent gives the inventor over their invention, since you have a right to use and sell your car or house. A patent does not give these rights to an inventor over his invention.

Rubbish. Last time I checked, patentees have the right to use and sell their patents, as well as to license them. I think we went down this road once before. LeBron James doesn't have an economically relevant monopoly over LeBron James's basketball services. The relevant market is the market for NBA players. There are players on the supply side of the market, and teams on the demand side. There is no such thing as a monopoly over your own property.

In defining a monopoly as an exclusive right to a market, which a patent doesn't grant as you rightly point out, you are using a too restrictive definition of monopoly.

Bill:

I must provide a bit more precision to a statement you made. You state that "Last time I checked, patentees have the right to use and sell their patents..." However, "use" does not necessarily mean "make" a product covered by the claims in a patent. That is why Steve stated that ownership of a house or a car extends more rights to an owner than a patent does. Except in extreme circumstances, an owner may sell their house at their whim. However, a patent does not grant me the right to make and sell an invention claimed in a patent, even though a patent is essentially a written description of an invention. As has been noted many times before, from a rights perspective a patent is a disabling document, not an enabling document, versus title to a home or car, which is enabling.

In the context of this site, a monopoly is either a natural or unnatural absence of competition.

Authors may have a natural monopoly in the production of signed copies of their book 'Against Monopoly'. But then there's nothing wrong with such a monopoly - being natural. Indeed, the state should protect such monopolies.

The state could grant a publisher an unnatural monopoly in the production of unsigned copies of the book - since without foul play the publisher could not naturally prevent others competing. Thus an unnatural monopoly, even if granted by the state, is equivalent to foul play.

It is irrelevant to the definition of an unnatural monopoly whether it is phrased as the 'exclusive privilege to produce' or the 'privilege to exclude others from producing'. You can substitute 'legal right' in place of 'privilege' if you think it adds legitimacy, or 'utilise' or 'sell' in place of 'produce'.

This site is implicitly against unnatural monopoly. It would be silly to be against natural monopolies, since they cannot be undone except through unnatural means.

You can naturally prevent someone copying the design of the bread slicer in your private possession, but you cannot naturally prevent someone making a copy of the bread slicer that you sell them (in their private possession). You certainly can't naturally prevent someone independently producing a similar bread-slicer. If you petition for, and are awarded the grant of a privilege to prevent others producing copies or similar devices, this may be termed a patent, but that is simply a specific term to describe what is clearly an unnatural monopoly. The patent results in an unnatural absence of competition in the production of bread slicers having a similar design.

As has been noted many times before, from a rights perspective a patent is a disabling document, not an enabling document, versus title to a home or car, which is enabling.

True, it is a disabling device, unlike a property right in a house. It still has a few positive rights attached to it, however, such as the right to sell or license. I suppose a patentee also has the right to eat his patent, or to let his dog play with it. The fact that a patent excludes a non-holder from exercising some of his own rights in relation to the object of the patent, is proof positive that it's a criminal set up.

I also should have mentioned, in regards to the economics of a patent, that a patent stymies competition in the thing patented (and thus creates monopoly rents). A patent truncates market competition, which is part and parcel of a monopolisitc privilege granted by the State, an official criminal gang.

Wherever you are on the political spectrum, whether a supporter of the state as a protector of natural rights, or an anarchist against it, however you look at them, the monopolies of copyright and patent are unsupportable by rational argument. They can only be supported by the desperate contortions of those who enjoy them or hope to, and those corrupted by them who would do anything to have them remain on the statute books...

Bill:

Yes, a patent "stymies competition" in the patented thing during the duration of the patent. However, the stymy of competition would drive a would-be competitor to seeking an alternative, which historically has led to societal benefits from the alternative options sought. Indeed, in many dramatic cases the alternative driven by the desire to avoid patents has led to much better solutions. For examples, patents drove alternate diesel technology, and the alternate technologies eventually supplanted the original. Patents drove alternative airplane technology to avoid the Wright Brothers patents. However, some wonder whether we would have been better off using their original controls strategy rather than the alternative developed by Curtiss. Interestingly, we have been exploring the original Wright Brothers technology as the age of that technology approaches passes 100 years.

Crosbie:

I am unsure of who much lack of "rational argument" there is. Thomas Jefferson provided the original argument for the benefit of patents, and I think his argument is really the only argument - and a darn rational one at that.

Anon.:

No question that work around solutions can work, as in the cases you cite. However, there's no reason that these solutions couldn't be found in a free market, that is one without patents. The market should decide winners and losers in inventions and innovation, not patents and courts.

See Boldrin's and Levine's discussion of the innovative benefits of copying, or as Lessig and others would put it in a copyright context, remixing.

Bill:

I think the diesel engine is perhaps one of the best examples of failure of the free market.

In this particular case, the "first mover" advantage worked. There was a good demand for diesel engines and a couple of early inventors held the market. When Clessie Cummins began working with diesel engines, several decades after the first diesel patent, he was disappointed at a number of problems that diesels had; he thought he could do better.

What ensued was nearly two decades of loss as Clessie attempted to perfect a better diesel, while the market continued to accept the original designs as the "best" that a free market could provide (remembering that all the important diesel patents had expired during the period of development). However, being personally sure that a better diesel could be built and spending the vast sums (for that time) necessary to develop a better engine are two different things. Fortunately, banker W.G. Irwin had faith in Clessie's ability and his vision - because the market place did not.

After nearly two decades of development, Clessie and his team perfected the features that would take diesel engine technology to a new level, in spite of the disbelief of the "first movers" and a market reluctant to adopt Cummin's technology. It is a certainty that without the investment of W.G. Irwin, the vision of Clessie Cummins and the patents that Cummins obtained that diesel technology as we know it today would have proceeded at a substantially slower pace.

Even having better technology, it took a while to convince the "market" that the technology was better than the older technology. Fortunately, the patents acquired by Cummins Engine Company permitted the company to become established, because other companies quickly recognized the benefit of Cummins' inventions, even though Cummins initially had only a minor market presence. Undoubtedly, competitors would have copied Cummins' inventions without those patents (in fact, they did copy those inventions and lawsuits ensued; fortunately, Cummins won) and Cummins Engine Company would have been a footnote in history.

As it is, Cummins was a late-comer, developed a better design, but needed time for the market to recognize the value of the new technology. The entrenched players had the industry presence, distribtuion, sales, service and marketing. Cummins Engine had none of that, they just had good inventions. Once those designs were copied, the entrenched players would have kept the market to themselves. Patents made the difference between Cummins succeeding and failing.

I think it's pretty much agreed that monopolies can be so lucrative they become indispensable to those granted them and can prevent such companies going bankrupt, however that doesn't make the case for monopolies.

If I was given a monopoly then I may well be otherwise unable to keep up the mortgage payments on umpteen villas and afford to maintain a yacht and fleet of Ferraris, but the maintenance of my wealth and economic viability is not a good reason to grant me the monopoly, to suspend the liberty of millions of my fellow men (at considerable and greater economic expense to them, albeit spread so thinly only a few of them can measure it).

Monopolies are the gifts of a corrupt state to those it would privilege above the people.

Those in receipt of such privileges would be well advised to reject or otherwise neutralise them - rather than plaintively argue them as vital to their continued prosperity. The latter is the resort of the clueless aristocrat.

Crosbie:

I find your remarks amusing since I am neither clueless nor an aristocrat. Further, such ad hominem remarks are not evidence nor rebuttal of facts.

As for your previous comment regarding being "lucrative" and preventing companies from going bankrupt, it is obvious you did not read my comments. However, I will attempt once again, in a more simple form:

(1) The diesel engine was invited, 1890's.

(2) A second version of the diesel engine was invented, late 1890's.

(3) A third version of the diesel engine was invented, 1910's.

(4) The companies that invented the first three engines established a market for their devices and held 100% of the market by the 1920's.

(5) Approximately 30 years after the invention of the diesel, Clessie Cummins becomes interested in diesel engines.

(6) Cummins believes he can solve the numerous problems of the diesel engine. However, Cummins has no money; i.e., he ain't no aristocrat, though the others in this industry are.

(7) Cummins interests W.G. Miller is investing in a business to develop diesel engines in 1919, and Cummins Engine Company is formed.

(8) Cummins continues to invent improvements to the diesel, but the fledging company fails to make a profit for about 20 years as the entrenched companies have superior distribution and marketing. In spite of the losses, W.G. Irwin continues to invest the current equivalent of millions of dollars in the company.

(9) Clessie Cummins and several others invent a series of mechanisms that have the potential to make an improved diesel engines in the period 1919 to 1939. However, the market does not respond to these improvements, sticking with the "tried and true" devices of the original entrants in the market.

(10) Cummins Engine Company hovers on the verge of bankruptcy for about two decades.

(11) The market finally recognizes the benefits of Cummins' inventions and sales begin to skyrocket. As Cummins begins to penetrate the market and make a profit, others increase their marketing and highlight "problems" with the Cummins system. However, Cummins' patents successfully prevent the entrenched players from driving Cummins out of business.

(12) After twenty years and the equivalent of millions in investment, the market finally recognizes the value of Cummins' inventions and Cummins begins to penetrate the market. Competitors, previously unable to copy Cummins' patented inventions, are finally spurred to improve their products as Cummins takes market share away from the entrenched companies.

So, let us examine some of your statements:

I think it's pretty much agreed that monopolies can be so lucrative they become indispensable to those granted them and can prevent such companies going bankrupt, however that doesn't make the case for monopolies.

Except, in this case the patents were not only not lucrative (which means you are wrong), but they were essentially irrelevant in profit and loss. However, what they did do was to prevent others from copying the superior inventions of Cummins while Cummins was able to get market recognition for the value of those inventions.

If I was given a monopoly then I may well be otherwise unable to keep up the mortgage payments on umpteen villas and afford to maintain a yacht and fleet of Ferraris, but the maintenance of my wealth and economic viability is not a good reason to grant me the monopoly, to suspend the liberty of millions of my fellow men (at considerable and greater economic expense to them, albeit spread so thinly only a few of them can measure it).

Except, Cummins Engine Company was on the verge of bankruptcy for most of two decades. They did not make a profit. It was only continued investment by W.G. Irwin and others in the Columbus, Indiana area and the patents that prevented competitors from copying the inventions owned by the company that permitted the company to survive for two decades. No villas. No yachts. No fleet of Ferraris. No maintenance of wealth. In fact, Cummins noted throughout this entire period that he was barely making enough money to feed his family. Thus, your point number two is without merit for this example.

Monopolies are the gifts of a corrupt state to those it would privilege above the people.

Let me see. Cummins was poor. He remained poor. Many of the people investing in Cummins were poor. W.G. Irwin's investment in Cummins was even having a significant affect on family finances. No privileges. No Ferraris. No villas. Just hard-working people trying to establish a company in the face of brutal competition. Now, the competition might have had Ferraris, villas and yachts, but not the people involved with Cummins. Ergo, the "privileged" people you talk about were mostly middle class and lower.

Those in receipt of such privileges would be well advised to reject or otherwise neutralise them - rather than plaintively argue them as vital to their continued prosperity. The latter is the resort of the clueless aristocrat.

So, it is better to remain poor and down-trodden than to strive to better oneself with the small advantage patents provide. Good example for people. Clessie Cummins grew up poor. He remained poor. The vast majority of people he worked with were poor. They might have been clueless because they started a business from scratch and went up against large, entrenched companies, but they were far from aristocrats.

Do you have any other uninformed points you would like to make?

Please forgive my oversimplification. Patents aka monopolies prevent competition which, just as they help the wealthy monopolist remain wealthy, can also help the prospects of the poor little guy by allowing them time to amass the necessary capital with which to later exploit their invention.

The ability for monopolies to help those in receipt of them does not justify their granting.

And far from being an ad hominem, I suspect you'll find those who don't benefit from patents rather unrepresented in the arguments for them. Hence the privileged 'aristocracy' vs the rabble.

Feel free to continue to argue in support of patents on the basis they help those in receipt of them. That is not an interesting argument, because it is not in dispute. What is disputed is whether monopolies represent an economic benefit to society and a spur that accelerates cultural and technological progress - rather than an expensive impediment designed to siphon funds into the pockets of those in power via those they favour with them.

Crosbie:

Please forgive my oversimplification. Patents aka monopolies prevent competition which, just as they help the wealthy monopolist remain wealthy, can also help the prospects of the poor little guy by allowing them time to amass the necessary capital with which to later exploit their invention. The ability for monopolies to help those in receipt of them does not justify their granting.

So, your contention is that society was better off with bad technology in the hands of a few "elite" with their villas, Ferraris and yachts rather than advancing technology. At least I understand that you do not care whether competition is enhanced by patents, your only concern is that someone gains a monopoly for the very benefits of patents espoused by Thomas Jefferson.

And far from being an ad hominem, I suspect you'll find those who don't benefit from patents rather unrepresented in the arguments for them. Hence the privileged 'aristocracy' vs the rabble.

I have been working for the "little guy" for so long that I forget that in a few industries that patents benefit the "aristocracy." I am unable to give you numbers, but historically single inventors have represented 20% to 30% of all issued patents. Unfortunately, that number has been declining. I will always be rooting for the little guy who would otherwise have zero chance against the big boys without patents.

Feel free to continue to argue in support of patents on the basis they help those in receipt of them. That is not an interesting argument, because it is not in dispute. What is disputed is whether monopolies represent an economic benefit to society and a spur that accelerates cultural and technological progress - rather than an expensive impediment designed to siphon funds into the pockets of those in power via those they favour with them.

Regardless of the examples I provide that indicate the downtrodden and even society has benefited from patents, the best argument you have is that they are "an expensive impediment designed to siphon funds into the pockets of those in power." Could be, but there are an awful lot of examples of people like Clessie Cummins and Tesla and on and on who were the little guy faced with overbearing competition that either held the market in such a grip that competition verged on being impossible or they deliberately stifled competition and the only thing that helped the little guy was a relatively cheap patent. Pardon me, but I think enhancing the ability of the little guy to compete just improves society rather than detracting from it - in spite of the few number of examples where patents have been abused.

Anon.:

The diesel story and the travails of Clessie Cummins shows that, far from being an example of market failure, it was an example of monopoly rents from patents issued to Diesel et al. impeding his progress. The fact that he suffered losses in the early years even though he had a superior product goes to show the power of patents in entrenching rent seekers and impeding upstart competitors. You've got your theory backwards.

Bill:

The original Rudolf Diesel patents expired about ten years before Cummins became interested in Diesel's engine. Cummins also took a license to the current crop of diesel patents to be able to enter the market. Cummins original intent was to produce the engines under that license, but what he discovered was that the design was lacking, so he decided to develop a better engine. Cummins never had an issue gaining a license, it was only when he came up with a completely new design that he had issues, and his issues were not with the patents of entrenched competitors, but their established position in the market.

I stand by my original statements.

Be that as it may, it's not an example of market failure. He overcame "their entrenched position in the market." To the extent that their "entrenched position" was the result of patents, it's not a market failure. To the extent it wasn't, it was just the market at work.

Markets don't fail (or succeed), only individual people and institutions do. It makes sense to talk about the failure of a bank or group of banks, for example, but markets don't fail. My pizza restaurant failed, but fortunately no one died.

Be that as it may, it's not an example of market failure. He overcame "their entrenched position in the market." To the extent that their "entrenched position" was the result of patents, it's not a market failure. To the extent it wasn't, it was just the market at work.

Perhaps there is a definition issue here.

(1) The existing designs had performance issues that at least one person (Clessie Cummins) believed could be improved.

(2) Cummins developed an improved diesel engine that solved the problems of the previous designs.

(3) The incumbents used their position in the market place to restrict entry of the new design, while attempting to copy features of the new design.

(4) Partially because customers were swayed by incumbents, a new design that solved the problems of previous designs was not adopted.

(5) Cummins spent almost two decades trying to convince people that he had a better product. Fortunately, the incumbents were unable to copy Cummins' designs because of Cummins' patents, giving Cummins the decades it took to establish a market position.

Observations:

The market recognized a better design after almost two decades of marketing.

Patents prevented incumbents from copying the better design until the market recognized the better design and the new entrant had an opportunity to compete.

Perhaps that is not market failure, but enabling a market by temporarily preventing copying of a new design by encumbents.

Markets don't fail (or succeed), only individual people and institutions do. It makes sense to talk about the failure of a bank or group of banks, for example, but markets don't fail. My pizza restaurant failed, but fortunately no one died.

I was merely using the words that others frequently use (nearly 800,000 Google hits) to describe the appearance of an event. Since usage dictates correctness, and there is a preponderance of usage, the terminology appears to be appropriate.