Extensions to the Model

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Patent Scope

There are at least two interesting arguments that criticize the results we have depicted. The first argument deals with the definition of patent width. Klemperer presents a model in which patents are rectangular in shape, but the width of a patent is determined not by profit, but rather by the patent scope - to what degree competitive products must differ before they fall outside the legal range of the patent.

Interestingly, Klemperer finds that as patent scope increases, social welfare may frequently increase. This is because when patents are narrow, consumers may decide to buy alternative products that fall outside of the scope of the patent. These competitive products are produced in a competitive market, and so generate no profit in equilibrium. However, customers that buy these competitive products incur “transport costs,” the loss in value from consuming a less preferred good.

When demand is highly elastic, and almost all consumers value a patented good at the same price, the patent holder will select exactly this price to charge for her product, or risk loosing all customers. Thus, the patent scope will have little effect on price and hence little effect on deadweight loss. But widening the scope minimizes transport costs incurred by consumers who buy competitive products, so this may be socially profitable. In fact, Klemperer shows that under some conditions, arbitrarily wide patents are optimal.

As in the Gilbert and Shapiro model, in the Klemperer model, the scope of a patent affects the price that a firm charges. This happens because the scope of a patent affects the availability of substitute products and hence the demand curve that the firm faces. The patent holder then rationally chooses a price that maximizes her profit given her demand curve. Note that the mechanism here is the rational, profit-maximizing behavior of the firm. Changing the scope changes the demand curve, which changes the firm's decision.

However, as Gilbert and Shapiro argue, there are other ways to constrain the price of a product, even with a fixed demand curve. Hence, the two definitions of patent width - price charged and scope - can vary at least semi-independently. An encompassing model would visualize patents as three-dimensional objects in which price, scope, and length can each be altered.

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