Furthermore, intellectual property protections encourage firms to rent seek. That is, they encourage firms to use the legal framework to gain a benefit from the government, instead of focusing on innovation and creating the products protected by those laws. For example, a firm may spend time and other resources on suing other firms for allegedly violating their intellectual property or they might lobby heavily for more regulations to cover their specific interests at the expense of competitors. Such behavior results in consumption of resources without increases in productivity that would come from actual innovation. Even Acemglu and Akcigit (2012), who defend IP protection laws as beneficial in certain cases, recognize that broad protection for all firms diminishes their effectiveness. According to some of the literature, rent seeking is almost the only conduct encouraged by IP laws. Park (2010) takes a similar view, asserting that however strict intellectual property regulations are, their exact design is important so as to avoid undesirable effects. Boldrin and Levine (2004) show that since the benefit of a one form of IP regulation, patents, is to grant a monopoly on a newly invented product, firms will naturally rent seek. Boldrin’s analysis is sound, although some specific examples used may lack accuracy (Selgin and Turner, 2006). Goolsbee, Levitt, Syverson (2012) also acknowledge that, in practice, patents lead to large amounts of waste due to rent seeking. All firms would like to be free from competition, and patents give a legal way for them do so, but do not restrain the negative externalities of monopoly.
Boldrin and Levine also respond to the possibility that private rent seeking in the absence of patents may outweigh any harm done by public rent seeking with them. That is, it is possible that without patents, firms would simply keep their innovations secret forever and thus they would never be available for use by other firms as they would when a patent expired (Boldrin and Levine, 2004). The argument, from this perspective, would continue claiming that patents have the effect of getting secrets out into public by promising that they will be protected by the government for a certain duration of time. At the end of that time, they are then available to everyone as they would be if they had never been secrets at all. Boldrin and Levine (2004) correctly recognize the weakness of this argument. Firms know the duration of patents when they choose to reveal their secrets by applying for protection of them. If they expect that their secrets can be kept for longer than the term of the patent, then they will not apply for the patent. If they expect their secret will be discovered before the end of the patent term (usually because it is easily learned by examining the product), they will take the patent (Boldrin and Levine, 2004). Therefore, private rent seeking is merely incidental to and not changed by a system of IP protections.
Additional distortion in firm decision making derives from the fact that not all types of innovations are patentable or copyrightable. Since the government is offering a monopoly on some types of inventions and creations and not on others, firms are incentivized to invest in those types of products which are protected. Campbell, Huang, and Luckraz (2012) show that greater IP protection tends to change not just whether a firm innovates, but how it does so. Patent and copyright law puts the government in the driver’s seat regarding what types of innovation investment should take place rather than entrepreneurs acting in accordance with price signals.
If IP protectionism ceased, it is unlikely that total innovation would cease with it or even decline. Many inventions and innovation took place prior to the enactment of such laws. If innovation only occurs where IP is protected in the form of government granted monopolies, then we should find that past inventions only took place in the industries and locations in which such privileges were granted, but this is not the case. One must also observe that restricting access to new innovations as the effect of making many other innovations illegal because no one may improve on a design that is protected by a patent. Removing that protection would free up inventive entrepreneurs to make better and more efficient versions of previous discoveries or use those findings for a completely new technological advance.
Some, like Richard Epstein (2013), usually in favor of as little regulation as possible, have argued that some industries, such as software development, should be under some form of IP regulations. To take a different example from Epstein but still a popular one, used by Goolsbee, Levitt, and Syverson (2012), pharmaceuticals have inherently very high costs of development and very low barriers to replication so that, the argument goes, patents really are necessary to spur investment in new technologies and products. Even if there exists a situation in which the sunk costs of research and development are so large that some IP protection is the only way to get innovation to occur, there are less restrictive and anti-competitive ways to make such invention possible without granting monopolies. Boldrin (2009) points out that much of the cost of getting a new drug to market, which is born by its originator and not by imitators, is actually the product of government mandated clinical trials. Therefore, he argues, we can offset some of this cost is allow all other firms to produce generic versions of an already invented drug, but require them to pay a portion of the cost of the trials. This method would be preferable to granting monopolies in almost all cases. By requiring firms which replicate existing technologies to pay some of the high cost of R&D which allegedly make some form of IP protection necessary allows for more innovation and competition but also offsets the sunk costs of the original inventor.
Overall, patent and copyright laws have a negative impact on a firm’s decision. Rather than encouraging innovation, they, in many cases, discourage it. They distort the firms incentives and lead to public rent seeking. So called intellectual property is fundamentally different from what is normally understood as “property,” and the government monopolies that protect it are economically detrimental.