Can the Innovation Process Survive A Competitive Market?
In Perfectly Competitive Innovation, a March 2002 research department staff report for the Federal Reserve Bank of Minneapolis, Michele Boldrin and David K. Levine address whether current copyright, licensing and patent laws which grant monopolist rights to inventors beneficial or harmful to the innovation process. The authors suggest the latter in certain markets.
Most modern analysis of innovation, the authors contend, is based on models assuming monopolistic competition as a prerequisite for understanding innovation and growth. Instead, Boldrin and Levine conceive a model that confers the "right of first sale" practice that was granted to entrepreneurs historically [defined loosely as before the mid-19th century]. They also argue that, contrary to prevalent opinion, idea generation and the creative effort should be viewed as sunk costs instead of as fixed costs. Models based on competitive markets can address sunk costs.
The econometric model developed by Boldrin and Levine supports the conclusions that:
- "the historical process of technological innovation is best understood in a perfectly competitive environment, where externalities have only a secondary impact;"
- "there is nothing either natural or socially useful in the monopoly power the state confers upon innovators;" and,
- "from the viewpoint of social value," current copyright laws and intellectual property practices that encourage monopoly discourage future innovation.
As a result, their model, which is described as "a positive theory of technology change," has normative implications in markets meeting the model's assumptions, including a truly competitive environment that rewards innovators but not through the monopolistic measures in place today.
The paper can be downloaded from: http://minneapolisfed.org/research/sr/sr303.html