Review Questions for Innovation Course  Fall 2007

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.    List the main virtues of intellectual property as an incentive system.

12.    List some defects of intellectual property as an incentive system, which are shared by prizes.

13.    Chapter 2 refers to Vickrey auctions.  Suppose that the potential value v of an innovation is known, and is so high that sponsor want the innovation developed.  Nevertheless, they would like it developed by the innovator with lowest cost, e.g., innovator 1 if c1<c2 .  Explain how the sponsor can run a Vickrey auction to ensure that the lowest-cost firm accepts a contract to develop the innovation.  What is the more usual way to run an auction to find the lower-cost firm?

14.    What is the difference between targeted prizes and blue-sky prizes?  Give an example of each.

15.    If cost (value) of an innovation is observable, is there anything wrong with making a prize equal to the cost (value)?

16.    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.

17.    Give two reasons that accounting cost is not the economist’s notion of cost.

18.    To procure airplanes, the U.S. government has sometimes run prototype contests in which two or more firms were asked to build prototypes, realizing that only one prototype would be chosen for production.  Why might an aerospace firm be reluctant to participate?  Give a solution to this problem.  Explain why prototype contests are costly mechanisms, and say, in terms of what is observable or verifiable to a sponsor, why they might be necessary.

Chapter 3:  top

19.    What does “intellectual” property have in common with other forms of property, like land or chattels?

20.    Why is ownership of intellectual property harder to enforce than ownership of other property?

21.    Explain the most important ways that patents protect differently than copyrights.

22.    What is the role of claims in a patent?

1.       What is the role of disclosure in a patent?  Is disclosure a goal for granting copyrights?

2.       Explain why a firm would (would not) choose trade secrecy over a patent.

3.       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?

4.       Patent-driven startups like Tensilica (see patent) have the problem of funding their efforts before they are in a position to attract VC funding.  Suppose that the founders put in $1m, and then get another $1m in a round of funding from venture capitalists. Explain why the venture capitalists might receive more (respectively, less) than half the equity in the firm.  What is “dilution?”  Does “dilution” mean that the venture capitalists took advantage of the financial neediness of the founders?

5.       The business plan of Tensilica is to create patented intellectual property and then to license it. Does licensing overcome the basic defect that patents create deadweight loss by excluding users?

6.       What problems would a public sponsor face if he tried to use a prize mechanism to stimulate patented inventions such as the Tensilica patent?In the Google news wars, is it obvious that the newspapers are damaged by Google’s excerpting and indexing?  What defense to copyright infringement would be available to Google in the U.S. that is not generally available in Europe?

7.       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

8.       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?

9.       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). 

10.    What do we mean by the “breadth” of an intellectual property right?  What are the legal aspects that determine the breadth of a patent?

11.    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.

12.    What is the ratio test for deciding whether a broad, short patent is socially preferable than a narrow, long patent?

13.    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

14.    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?

15.    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.

16.    In the context of quality ladders, why might the statutory patent life be irrelevant?

17.    Explain what is meant by: Early innovators might get punished instead of rewarded for the foundation they create for later innovators.

18.    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?)

19.    Explain how patent “breadth” operates on quality ladders.  How do broader patents increase the reward of innovators?

20.     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.

21.    Explain a sense in which it is misleading to say that patents last for 20 years.

22.    Explain why the joint marketing of complementary proprietary goods may lower their joint price. Use the figures in the chapter, and also explain intuitively.

23.    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

24.    Define the following: Exclusive Licensing, Royalties versus Fixed Fees, Pro-competitive, anticompetitive, Merger, Complements versus Substitutes

25.    Describe three ways in which licensing is procompetitive. 

26.    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.”

27.    Referring to the DOJ/FTC Antitrust Guidelines of 1995, what are “technology markets” and “innovation markets”, and how are they important in antitrust policy?

28.    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?

29.    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?)

30.    When are the antitrust authorities likely to view patent pools as pro-competitive or anti-competitive?  Give examples.

31.    If patents are noninfringing, in what circumstances will the antitrust authorities or courts view a patent pool as anticompetitive? 

32.    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

33.    Define injunctions and damages, and explain the two rules for calculating damages.

34.    Damages can be thought of as aimed at compensation or deterrence.  How do “lost profits” and “unjust enrichment” relate to these two policy objectives?  

35.    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?

36.     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. 

37.    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?

38.    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.

39.    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.

40.    Referring to the recent announcement that 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

41.    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?

42.    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.

43.    Chapter 8 discusses two models of how the U.S. government disseminates the results of the R&D and the data collection that it funds. Explain these two models. Give their rationales, and discuss whether the rationales are convincing.

44.    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.

45.    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.

46.    Describe advanced purchase commitments and virtual pharma strategies, as two approaches to funding drugs for neglected diseases.

47.    Compare the strengths and weaknesses of the above two strategies.

Chapter 9      top

48.    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.

49.    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?

50.    Explain the patent renewal system, and how patent renewals can be used to ferret out patent values.

51.    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.

52.    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?

53.    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

54.    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?

55.    In network markets, say what we mean by closed (or proprietary) standards.  Give examples.

56.    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.

57.    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.

58.    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.

59.    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?

60.    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

61.    Define each of: national treatment of foreign inventors, harmonization, TRIPS, parallel imports.

62.    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.

63.    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.)

64.    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?

65.    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.