Innovation through imitation

by October 8, 2011

An ad in the Wall Street Journal in 1981, when tech companies had a different attitude to competition

Patent wars are breaking out all over the high-technology industry, the most high profile of which is the battle between Apple and Samsung. Apple initiated hostilities in April on behalf of its market-dominating iPad and has won a preliminary injunction stopping the distribution of Samsung’s competing Galaxy Tab in Germany; Samsung has counter-sued in Australia to stop Apple’s use of certain wireless technologies in its iPhone and iPad lines, and hostilities have already spilled over into the court systems of Japan, Korea, the UK, and the Netherlands. The two companies, by the way, have been otherwise neighborly, as Apple is Samsung’s biggest customer for components like microprocessors and memory modules.

While patents are conventionally seen as essential incentives to innovation, Eric S. Maskin — an economist at Princeton’s Institute for Advanced Study, and a Nobel Prize winner for his work on mechanism design theory (an extension of game theory) — has argued that in some cases, greater access to patents can stifle innovation, rather than boosting it. Maskin and James Beeson (from Boston University’s School of Law) studied U.S. software firms in the 1980s, an industry where patent law had only recently been significantly strengthed, and found that contrary to expectations that patent protections would incent higher levels of innovation, R&D spending in fact gradually declined:

For industries like software or computers, there is actually good reason to believe that imitation promotes innovation and that strong patents (long patents of broad scope) inhibit it. Society might be well served if such industries had only limited intellectual property protection. Moreover, many firms might genuinely welcome competition and the prospect of being imitated.

This is because these are industries in which innovation is both sequential and complementary. By “sequential,” we mean that each successive invention builds on the preceding one—in the way that Windows built on DOS. And by “complementary,” we mean that each potential innovator takes a somewhat different research line and thereby enhances the overall probability that a particular goal is reached within a given time.4 Undoubtedly, the many different approaches taken to voice recognition software, for example, hastened the availability of commercially viable packages. […]

A firm that patents its product in a world of sequential and complementary innovation can prevent its competitors from using that product (or sufficiently similar ideas) to develop further innovations. And because these competitors may have valuable ideas not available to the original firm about how to achieve such innovations, the patent may therefore slow down the pace of invention.

Maskin and Bessen’s paper is available on SSRN here.