Review Questions for Innovation
Course Spring 2008
Questions related to chapter 2,
4, 5, 6, 7,
8, 9, 10, 11
(Other instructors using this material are
invited to send suggestions for this list, or send links to their own
materials.)
Chapter 1:
1.
True or False
(explain): Intellectual Property has historically been the main way of paying
for R&D outputs.
2.
When production was largely under the
control of trade guilds, why might the guild system have been a good way to
support innovation? What happened
instead?
3.
Explain how the case of copyright
protection illustrates that social institutions evolve in response to
technological change.
4.
How has the nature of
government-sponsored research (a) stayed the same and (b) evolved throughout
recorded history?
5.
Explain how the origins of patent law
were more about antitrust law than about patent law as we know it.
6.
Governments sponsored research in both
the 19th and 20th centuries. Explain the main differences in how a
supplicant sought funding in these two centuries.
7.
R&D has long been funded by private
charitable foundations as well as by governments. How did the nature of funding by foundations
change in the early 20th century, and how has government sponsorship
evolved to be similar to foundation sponsorship?
8.
If per-capita GDP in grows at 3% in
developed countries and 2% in developing countries, estimate how long it will
take for per-capita GDP to double in each place. Explain the estimation method. Assuming that both places start out at
GDP-per-capita = 100 and grow at these rates, estimate the ratio of GDP’s per
capita after 100 years.
9.
Chapter 1 argues that the institutions
that support R&D have “hybridized.”
What does this mean?
Chapter 2: top
10. Explain
the senses in which knowledge is a public good.
Is knowledge “excludable”?
11. If
you need some review in the basic microeconomics, click here.
12. List
the main virtues of intellectual property as an incentive system.
13. List
some economic costs that arise when innovations are funded with intellectual
property, which are shared by prizes.
Are all the economic costs associated with IP also shared by prizes?What is the difference
between targeted prizes and blue-sky prizes?
Give an example of each.
14. If
cost (respectively, value) of an innovation is observable, is there anything
wrong with making a prize equal to the cost (respectively, value)?
15. One
of the problems in trying to align prizes with costs is that “cost” is hard to
observe. What is the economist’s notion
of cost? Express it in terms that allow you to untangle what is meant by “cost”
for innovations that succeed with probability less than one.
16. Give
two reasons that accounting cost is not the economist’s notion of cost.
17. To
procure airplanes, the
Chapter
3: top
18. What
does “intellectual” property have in common with other forms of property, like
land or chattels?
19. Why
is ownership of intellectual property harder to enforce than ownership of other
property?
20. Explain
the most important ways that patents protect differently than copyrights.
21. What
is the role of claims in a patent?
22. What
is the role of disclosure in a patent?
Is disclosure a goal for granting copyrights?
23. Explain
why a firm would (would not) choose trade secrecy over a patent.
24. Explain
“fair use” of copyright, and why it makes sense as a public policy. Why doesn’t a copyright owner have the right
to prevent all uses of his or her work?
Is this true in all copyright systems?
1.
Does
this comment of Mr. Louette of Agence
France-Presse's comment (in NYTimes)
make sense? "this doesn't address
the real problem, which is that they attach no value to the headlines, pictures
and text from around the world that we spend a lot of money producing."
Chapter 4: top
2.
Assuming that a particular type of
innovation will be funded with intellectual property rights, is it optimal to
give long enough protection so that no innovations are lost due to insufficient
profit?
3.
If the reward to innovation is given as
an intellectual property right, there are various considerations in choosing
the size of the reward. What are the
important considerations when “ideas are scarce” and when “ideas are common
knowledge” (so that a patent race is likely)?
4.
What do we mean by the “breadth” of an
intellectual property right? (There are
several interpretations.)
5.
A broad patent right is more profitable
in each period than a narrow right.
Explain why this is true, referring to two different models, and explain
why it therefore makes sense to ask how the patent reward should be structured
as a policy matter.
6.
What is the ratio test for deciding
whether a broad, short patent is socially preferable than a narrow, long
patent?
7.
Referring to figure 4.3, explain how the
patent holder will fare when the rival’s product is (i)
unpatentable and noninfringing,
(ii) patentable and noninfringing, (iii) unpatentable but infringing, (iv) unpatentable and infringing.
Chapter
5: top
8.
Why might it be socially efficient to
create a reward system in which an early innovator is given some of the value
that is created by his successors?
9.
Explain whether the following is true or
false, and in what circumstances: Early
innovators are likely to be underrewarded for the
foundation they lay for later innovators.
10. In
the context of quality ladders, why might the statutory patent life be
irrelevant?
11. Explain
what is meant by: Early innovators might get punished instead of rewarded for
the foundation they create for later innovators.
12. Explain
why the following is true or false, and in what circumstances: In the context
of “basic” and “applied” research, it might be optimal to give as much
bargaining power as possible to the first innovator. (Will this hurt the
prospects for the second innovation?)
13. Explain
how patent “breadth” operates on quality ladders. How do broader patents increase the reward of
innovators?
14. Evaluate the following statement: A defect of
broad patents is that they may prohibit future development of the same
technology by excluding other users who want to either improve the technology,
replacing it with a better product, or want to use the technology for a
completely new product or use.
15. Explain
a sense in which it is misleading to say that patents last for 20 years.
16.
Explain
why the joint marketing of complementary proprietary goods may lower their
joint price. Use the figures in the chapter, and also
explain intuitively.
17.
Developing countries argue that
intellectual property rights on products derived from local knowledge (such as
stabilizing neem oil) violate the rights of the
original inventors. Evaluate this from
an economic point of view.
Chapter
6: top
18.
Define the following: Exclusive Licensing,
Royalties versus Fixed Fees, Pro-competitive, anticompetitive, Merger,
Complements versus Substitutes
19.
Describe
three ways in which licensing is procompetitive.
20. What
is the main difference between the two sections of the Sherman Act? What is “rule of reason?” Gives some examples of how rule of reason
might be raised as a defense in a challenge to a merger in an “innovation
market.”
21. Referring
to the DOJ/FTC Antitrust Guidelines of 1995, what are “technology markets” and
“innovation markets”, and how are they important in antitrust policy?
22. In
the case of a cost-reducing innovation, describe some terms of license that
will enable the innovator and his rivals to collude. (What does “collusion”
mean in this context?) Explain why each
of your terms of license is necessary for the result. That is, why will the collusive deal be
broken without that term of license?
23. What
is likely to be the efficiency justification of firms that want to form a joint
venture instead of racing for a patent?
Why might the antitrust authorities not believe this argument? (Why
might the joint venture be bad for consumers?)
24. When
are the antitrust authorities likely to view patent pools as pro-competitive or
anti-competitive? Give examples.
25. If
patents are noninfringing, in what circumstances will
the antitrust authorities or courts view a patent pool as anticompetitive?
26.
Explain why collective rights management
organizations might yield a different market outcome than individual licensing
in the absence of transactions costs.
How does the outcome depend on who controls the number of members in the
organization?
Chapter 7: top
27. Define
injunctions and damages, and explain the two rules for calculating damages.
28. Damages
can be thought of as aimed at compensation or deterrence. How do “lost profits” and “unjust enrichment”
relate to these two policy objectives?
29. Some
commentators argue that, due to litigation costs, patent law facilitates
collusion among innovators whom Congress intended to be competitors. Give an
argument for how this might work. What
do we know about litigation costs and the prevalence of litigation?
30. Inkjet printers were developed more or less
simultaneously at Canon and HP. This led
to controversy over patent rights, which was eventually settled by
cross-licensing. The firms believe that
they then became fierce competitors in the market. Explain why this conclusion might be
misleading, and use the example to illustrate the challenges for competition
policy when it is uncertain whether one firm’s discoveries will infringe
another firm’s patents.
31. In
the example of inkjet printers, is it your impression from the readings that
most of the patents were on complementary aspects of the technology? Does that
matter for whether the effect of the patent settlement was to increase or
decrease the price of inkjet printers?
32. Give
an argument that a reliance on technical protections (digital rights
management) will lead to lower prices than would be available with perfect
legal enforcement.
33. Some
observers have argued that it is only unlimited
sharing of proprietary products (such as by making them available on the
internet) that threatens the ability of creators to recover their costs.
Indeed, it has been argued that sharing might even enhance the vendors’
profits. Explain.
34. Referring
to the agreement between Microsoft and Novell (using Linux) to cross-license
their patents, why might a cynic worry that the agreement is
anticompetitive? Does this worry have
merit?
Chapter 8
35. Why
might data-sharing reduce the time to discovery? Do academic incentives and
intellectual-property incentives differ in the incentives that researchers have
to share intermediate stages of knowledge? Which is superior?
36. Explain
how the government grant process operates to make sure that grantees actually
have good ideas for research, and perform as promised. Explain why this system is more costly than
if the government could observe directly whether the research was fruitful, and
if it could take back the money if unfruitful.
37. Chapter
8 discusses two models of how the
38. In
2004, California taxpayers voted to fund a Stem Cell Institute. Some advocates argued that taxpayers would
get their money back, and other advocates argued that the resulting
technologies would reduce health care costs for California patients. Explain whether these views are consistent
with each other, and whether they are based on different premises about how the
results of public funding are disseminated.
Refer to the two models in the previous question.
39. It
is probably misleading to think of the intellectual property system as the main
engine of technological growth in modern industrial economies. Using aggregate
information about expenditures, argue that the public sector also has a large
role in R&D.
Chapter
9 top
40. Using
aggregate accounting data for the R&D-costs of patents (R&D
expenditures divided by patents), and using what we know about the commercial
value of a patent right, argue that patents alone cannot be the main source of
incentives for R&D.
41. Within
the public sector, R&D is funded is several very different ways. Explain
several different methods of public funding, referring to specific agencies of
the U.S. federal government. For which
types of innovations (regarding the inventive process, as to whether R&D
objectives are commonly known or “scarce ideas”) do these methods,
respectively, make sense?
42. Explain
the patent renewal system, and how patent renewals can be used to ferret out
patent values.
43. Which
government agencies fund most R&D? Explain the difference in how the NSF
and Department of Agriculture has traditionally funded R&D, and why
different modes of funding do or don’t make sense.
44. The
invention at CERN of the WWW’s file-sharing protocols
has much in common with the invention of email at ARPA. Explain how they are similar, relating your
answer to the notion that “ideas are scarce.”
Would a prize system have been suitable for eliciting these inventions?
45. Summarize
various kinds of evidence that patent values are skewed, in the sense that most
patents have very little commercial value, and a few have very high value. What implications does this have for how to
evaluate the success of R&D efforts?
Chapter 10: top
46. A
virtue of competitive markets in the “old” economy is that they are
efficient. Explain why competition
generally leads to efficiency, and explain why network benefits in the “new”
economy may set up a conflict between competition and the efficient way of organizing
the market. Is there any solution to
this conflict?
47. In network markets, say
what we mean by closed (or proprietary) standards. Give examples.
48.
In
markets with competing operating systems (or other platforms that make
complementary goods available, such as computer software), explain why one
operating system may drive out the other in the market. Use the concepts of direct and indirect
network effects.
49.
A
general premise of microeconomics is that competition among firms is good for
consumers. Is this always true in
network markets? Link your answer to the
notion of standards as the thing that defines the network, and to the notion
that standards may be shared (open) or closed.
50.
Is
there any argument from a social-welfare point of view (taking account of
consumers’ desire for many applications and low prices) that closed standards
might be socially preferable to open standards?
Give some arguments that open standards are better from a social-welfare
point of view.
51.
From
a business-strategy point of view, can you think of circumstances that might
cause firms to operate with open standards? (Give examples.) Assuming that firms prefer closed standards,
but that open standards are better for the economy as a whole, can you think of
policy tools that will help ensure that standards are open?
52. In the context of
“physical” networks (telecommunications, internet) explain how network effects
enhance the “naturalness” of natural monopoly.
Compare telecommunications networks with electricity grids.
Chapter 11 top
53. Define
each of: national treatment of foreign inventors, harmonization, TRIPS,
parallel imports.
54. Assuming
that nations have signed treaties for national treatment, explain why small
countries might choose weak IP protection, while large countries choose strong
IP protection.
55. Explain
how both the consumers (users of IP) and innovators in a small country can
“free ride” on large countries, if they belong to treaties for national
treatment. (The notions of free riding
are slightly different for the users and the innovators.)
56. Again
assuming that nations have signed treaties for national treatment, explain why
the strength of protection that a country would “advocate” in a harmonization
effort is different than the strength of protection it would choose
independently if all nations made independent choices. Would you expect it to advocate stronger or
weaker global obligations than it would choose independently?
57. Give
an argument that the system of national treatment tilts R&D systems away
from public funding with free access toward a system of R&D incentives
based on intellectual property rights.