Why Monopolies Are Good

The term intellectual property reflects the idea that its subject matter is the product of the mind or the intellect. It could be in the form of patents, trademarks, and copyright. The law protects intellectual property like any other form of property. It can be owned, bequeathed, sold, or bought. Unlike other forms of property, the main distinguishing feature of intellectual property is its intangibility and non-exhaustion by consumption.

Patents grant ownership rights to inventions and other technical improvements. Copyright confers ownership rights to authors, artists, and composers. Trademark establishes rights in distinctive commercial marks or symbols.

Intellectual property rights are the foundation of knowledge-based economies. It pervades all sectors of the economy and is fast becoming important for ensuring competitiveness of business enterprises.

In a free market economy, the state is concerned with improving consumer welfare by constraining the behavior of firms with market power. Intellectual property rights confer a certain degree of monopoly power on the owner of the intellectual property. Both have a common goal of enhancing consumer welfare.

From an economist’s point of view, there are two broad classes of goods:

1. Private goods which are rival in consumption.

2. Public goods which are non-rival in consumption.

Private goods can be publicly owned and public goods can be privately owned. Public goods are non-exclusive. People cannot be excluded from using them. It can be used simultaneously by many people; its use by one application does not make it harder for other people to use the same good. Private goods cannot be used simultaneously by more than one person.

The necessity to promote competition and protect intellectual property rights is embodied in the guidelines and regulations issued by the Department of Justice and the Federal Trade Commission in 1995.

Granting exclusive property rights to the creator of an idea provides an incentive to create ideas, and excluding others from using an idea enables the creator to determine the price above marginal cost and impedes their dissemination and application.

Once a good has been discovered, the cost of producing a non-rival good is zero. The marginal cost of such good is zero. When prices are equated to marginal costs, resources are allocated efficiently. Efficiency is lost if the price of a non-rival good is above zero. If the price cannot be more than zero, there can be no motivation for development. By acquiring an intellectual property right in a non-rival good, it is possible to make it excludable and prevent it’s use by others.

To give people an incentive to produce socially desirable new innovations, the law allows the creators of a non-rival good to appropriate the returns of their innovation for themselves alone through intellectual property rights. But since intellectual property rights make a non-rival good excludable, it constitutes an inefficiency – the price of the good will be above the marginal cost of producing the good. Conferring ownership of intellectual property rights is tantamount to conferring a monopoly.

Unlimited protection of intellectual property gives rise to two problems:

1. Discouraging dissemination of inventions and ideas, i.e. under-utilization.

2. Encouraging a race among inventors, i.e. over investment in research and development.

As such economists have to adjudicate as to the desirability of using intellectual property rights as a spur to innovation and as an instigator of monopolistic inefficiency.

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