The economics of ideas and intellectual property Michele Boldrin and David K. Levine Department of Economics , University of Minnesota , Minneapolis , MN 55455 ; and Department of Economics , University of California , Los Angeles , CA 90095 Edited by Thomas J. Sargent , New York University , New York , NY , and approved December 10 , 2004 -LRB- received for review October 18 , 2004 -RRB- Innovation and the adoption of new ideas is fundamental to economic progress . Here we examine the underlying economics of the market for ideas . From a positive perspective , we examine how such markets function with and without government intervention . From a normative perspective , we examine the pitfalls of existing institutions , and how they might be improved . We highlight recent research by us and others challenging the notion that government awards of monopoly through patents and copyright are `` the way '' to provide appropriate incentives for innovation . economic theory game theory C entral to understanding the market for ideas and the incentives for the adoption of new ideas is understanding how ideas might be different from other goods . The starting point of the economic analysis of innovation is to recognize that the economically relevant unit is a copy of an idea . That is , typically , many copies of an idea exist in physical form , such as a book , a computer file , or a piece of equipment , or in the form of knowledge embodied in people who know and understand the idea . Only these copies matter , first , in the sense that if they were all to be erased , the idea would no longer have any economic value , and , second , in the sense that the copies are extremely good substitutes for each other : Whether a copy of an idea is the original copy or the hundredth copy , it is equally economically useful . From the perspective of the functioning of markets , then , property rights in copies of ideas is assured by the ordinary laws against theft : What is ordinarily referred to as `` intellectual property '' protects not the ownership of copies of ideas , but rather a monopoly over how other people make use of their copies of an idea . Common legal and economic wisdom argues that competitive markets are not suitable for trading copies of ideas , as ideas are intrinsically different from other economic commodities . For the most part , these arguments are incorrect . However , there is one dimension in which economists agree that ideas differ in an important way from other goods : The first copy of an idea must generally be produced as a single indivisible unit . For example , two first halves of a book are not a good substitute for both the first and second half . Although most goods are subject to some degree of indivisibility , quantitatively , the indivisibility is crucial for ideas . In much of the economics literature , especially in Romer -LRB- 1 -RRB- , the cost of this indivisibility is referred to as a fixed cost to emphasize the fact that it is paid once regardless of how many copies are later produced . The key economic question this raises is whether in competitive markets there is adequate incentive to produce the first copy of an idea . Earlier work , such as that of Romer -LRB- 1 -RRB- , suggests that because after the fixed cost is incurred without legal protection sales take place at marginal cost , leaving no profit to recoup the fixed cost , the answer to the question is negative ; without legal protection , there is inadequate incentive to innovate . However , we point out that this is the case only if one assumes that either marginal costs are zero -LRB- copies of ideas are perfectly nonrivalrous goods -RRB- or capacity constraints are not binding even immediately after the innovation takes place . In reality , and in the theory we develop , copies of ideas are rivalrous goods and there are generally capacity constraints ; hence , unless the innovator and his competitors can instantly flood the market with copies , ideas will always generate PNAS January 25 , 2005 vol . 102 no. 4 some rents for their creator . This gives rise to a different theory , where innovations may or may not arise in competitive markets depending on the size of the initial indivisibility or fixed cost , the speed at which capacity is built up , the size of the market , and the elasticity of demand . From a practical perspective , the issue is whether competitive rents are enough to give creators the incentive to invent an adequate number of socially valuable ideas . Making creators fabulously rich is not a relevant issue , unless this is an essential part of the incentive to create . Compensating creators for the opportunity cost creative activity involves is the economic issue to be addressed by the normative theory of innovation . Along most other dimensions , ideas are not different from other commodities , and those few dimensions along which ideas are different do not generally affect the functioning of competitive markets . 1 . It is argued that in competitive markets innovators would be unable to appropriate more than an infinitesimal share of the social value of their ideas . This misses the fact that ideas combine attributes of both consumption and capital goods . They can be used directly for consumption , such as reading a book or watching a movie , or they can be used as an input in production , by making copies of a book or movie , or by producing other goods , for example , by using the idea for an improved production process . That the original copy of an idea is the capital good -LRB- the tree -RRB- from which all other copies -LRB- the fruits -RRB- must originate enables innovators to appropriate the net present value of all future copies through competitive pricing . Corn seeds , for example , can be eaten or used for producing additional corn , so also combine characteristics of consumption and capital goods . Competitive markets for corn generate the appropriate incentive to invest in corn seed . 2 . The initial copy -LRB- or copies , when simultaneous innovation occurs -RRB- of an idea are generally produced through a process that is different from the one used to make subsequent copies , as in the case of original research versus teaching . Most capital goods -LRB- original research -RRB- are used to produce commodities other than themselves ; but the fact that capital goods might be used to reproduce themselves poses no particular problem for competitive markets . In the semiconductor industry , for example , reduction in chip size makes it possible to construct capital equipment that can be used to produce even smaller chips . 3 . There are suggestions that ideas are subject to `` spillover externalities , '' or what we might call informational leakage . That is , the existence of the idea enables people to learn it and make use of it without the permission of the original inventor . Some even argue that ideas can be copied for free . In practice , few ideas are subject to informational leakage , and in all cases they are costly to reproduce . In the case of copyrightable creations , where the ideas are embodied in physical objects such as books , informational leakage is not an issue . In the case of scientific advances , reflection shows that it is also not This paper was submitted directly -LRB- Track II -RRB- to the PNAS office . To whom correspondence should be addressed . E-mail : mboldrin@econ.umn.edu . 2005 by The National Academy of Sciences of the USA 1252 1256 www.pnas.org cgi doi 10.1073 pnas .0407730102 e 0 1t u x 0e / t dt P 1 x0 xc Materials and Methods In this section , we introduce the basic model to be used in the foregoing analysis ; we concentrate first on the relationship between the presence of an indivisibility in the innovation technology and the functioning of competitive innovation . It is useful to consider the simplified market for an idea studied by Quah -LRB- 2 -RRB- and Boldrin and Levine -LRB- 3 5 -RRB- . We begin by ignoring the indivisibility so as to understand how the competitive market would lead to efficient provision of ideas , then analyze the impact of indivisibility . We begin by supposing that x 0 initial copies of an idea can be produced at a per-copy cost of . At any Boldrin and Levine 4 x c x0 xc 1 1 2 1 1 . This is the condition for efficient provision of any good . Note that , in equilibrium , the individually optimal choice of x must equal the aggregate initial capital , x 0 . This analysis points out the way in which competitive markets for production that takes place over time function with goods that have both capital and consumption attributes . Here , there is no economic problem PNAS January 25 , 2005 vol . 102 no. 4 1253 ECONOMIC SCIENCES the case . Although in some sense scientific ideas are widely available , usable copies of scientific ideas are not so easy to come by . Even Newton 's laws require a substantial amount of time and effort to understand . For all practical purposes , copies are limited to those people who understand the laws and books that explain them . Without paying someone to teach you or buying a book that explains Newton 's laws , you are not terribly likely to learn them merely because they are in the public domain . As teachers and professors , we earn our living by our ability to communicate ideas to others , and in doing so , we create new copies of them . Overwhelming historical evidence shows that diffusion and adoption of innovations is costly and time-consuming . 4 . The extent to which ideas resemble other goods can be seen by examining the `` public domain '' for creative works for which copyright has expired . Although legal scholars have tended to view the public domain as a commons , like the atmosphere or ocean for which there are no property rights , in fact the market for a public domain book is very similar to the market for wheat or any other competitively provided good or service . Once copyright has expired , there are many copies of a book , each a good substitute for the other , and each owned by someone . If you want to read the book , make copies of it , or turn it into a movie , you must first buy the book from one of the current owners . If there are many owners , each competing with each other to sell you the book , you may be able to obtain it relatively cheaply , even though you intend to turn it into a highly valued movie . But the fact that you can buy ingredients cheaply is a good consequence of competitive markets , not a bad one . In fact , the evidence suggests that the market for goods in the public domain functions well , with copies widely available and reasonably priced . Finding a copy of a book by Dickens , for example , is no great problem . 5 . Lawyers have also made other arguments as to why ideas might be different from other goods ; but many of these arguments reflect a lack of understanding of how markets function . For example , it is often argued that without the monopoly provided by copyright , there would be an inadequate incentive to `` promote '' works such as books , music , and movies , because the benefit of the promotional effort would be shared by competitors . However , this argument applies equally well to other competitive markets , such as that for wheat . The point to understand is that under monopoly , goods are priced high , and the consumer receives little benefit . Hence , the monopolist has an incentive to subsidize information to the consumer . In competitive markets , the competitors do not have incentive to subsidize information , so consumers must pay the cost of obtaining it . Information about wheat is widely available -LRB- from doctors , diet advisers , books , magazines , and many other sources -RRB- but not directly from wheat producers . In competitive markets , not only is information widely available , it is less biased than the subsidized information provided by monopolists . Markets for ideas are no different in this respect . Plentiful information is available about works in the public domain , but that information is not generally provided by book publishers . moment of time , t , there are x t copies in existence . As an extreme but innocuous assumption , we imagine that copies of ideas can simultaneously be consumed and reproduced , so that a utility of u -LRB- x t -RRB- is obtained by consumers from consuming x t copies of the idea , while simultaneously the number of copies available grows x t. For simplicity , we use the quadratic at a constant rate , t x 2 -LSB- 2 -LRB- x x c -RRB- -LRB- x x c -RRB- 2 -RSB- for x x c and u -LRB- x t -RRB- 2 utility u -LRB- x t -RRB- c . Here , for x x is a measure of the `` quality '' of the idea , a concept we explore below . Observe that the utility maximum , -LRB- 1 -RRB- u -LRB- x t -RRB- 2 , is reached at x t x c , which occurs at time ln -LRB- x c x 0 -RRB- , and that utility remains constant after that date . Overall , the present value of consumer utility is 0 e tu -LRB- x 0e t -RRB- dt e tu -LRB- x c -RRB- dt , where time units have been normalized so that the subjective interest rate is one . Suppose that the technology for reproducing copies is available to everyone , so that anyone who has a copy can make and sell further copies ; in other words , there is no intellectual property . The crucial thing to understand is that because the reproduction technology exhibits constant returns to scale , all of the proceeds from the sale of the idea accrue to the owners of the original copies . For a more general technology , which uses inputs other than copies of the idea itself , the proceeds net of the opportunity cost of those other inputs will also accrue to the owners of the original copies . This is due to competition ; that is , there will be many people seeking to profit by making copies of the idea . Think here of a Napster-like distribution system for MP3s , albeit one in which owners of MP3s can legally sell copies . If the amount that I could earn by buying MP3s and selling copies , net of my personal cost , was positive , then you would compete with me to buy MP3s and sell copies , driving up the price of the existing copies we are each trying to obtain and driving down that of the copies we are each trying to sell . Ultimately , this competition between resellers means that they all earn zero profits . This is not true of the original creators , because , once they produce the initial copies , they own a factor that is in fixed supply ; the value of the latter , as we shall see , depends on the speed of reproduction and the circumstances of demand . Competitive provision of copies implies that the price of copies at time t is the marginal social value of an additional copy , u -LRB- x t -RRB- . Hence , if is the number of consumers , and the original producer -LRB- s -RRB- of the idea face competition for creating the first copies of the idea , the profit from producing x initial copies -LSB- holding fixed prices u -LRB- x 0e t -RRB- to reflect competition -RSB- is e tu x 0e 0 t xe tdt x. Competitive innovators maximize profits taking prices as given . This is solved by choosing x in such a way that the marginal cost of producing an additional initial copy of the idea equals its marginal social value , to be solved that is not already solved by the competitive marketplace . The problem that arises , as we have indicated , is that of indivisibility . Assume this is such that a choice of x 0 1 implies no innovation at all . It may be , depending on conditions of demand relative to , that the optimal initial choice of capital for a competitive innovator is x 0 1 , so that this indivisibility binds . In this case , the only realistic option is to choose x 0 1 . Although the creator still receives a positive revenue of P , it is insufficient to compensate for the cost of creation and so the good is not produced . We should indicate that although it is easy to work out the consequences of a binding indivisibility in this simple setting , general equilibrium theorists have yet to create a comprehensive theory of competitive equilibrium with binding indivisibilities . In the case of indivisibility , the issue is whether the revenue stream , P , evaluated at the minimum innovation size , x 0 1 , is sufficient to compensate for the cost of creation , . In the extreme case in which 3 , revenue P 3 0 ; in this case , no innovation would take place at all . It is a not-uncommon confusion to believe that this limit case is in fact the ordinary case . Both theory and evidence suggest that competition generates substantial revenues for innovators in most practical cases and that binding indivisibilities are the exception , not the rule . Note also a second common source of confusion : The revenue stream , P , accruing to the innovator almost never corresponds to the full social value of the new idea . This is more so when the invisibility x 0 1 is binding , and P may be a relatively small fraction of the total additional utility the innovation will bring to society . But this fact is of no concern for economic efficiency , as long as P holds ; institutions that allow creators to be compensated for the opportunity cost of their effort yield socially efficient outcomes . Making creators extremely wealthy is a by-product that is welcome to them but unnecessary to society . Remark . The creator may have a unique idea , in which case he faces no competition for providing it . He is a monopolist in the initial period and maximizes the objective function , 0 e tu -LRB- xe t -RRB- xe t dt x , with respect to x. Notice that here he no longer takes present and future prices , u -LRB- xe t -RRB- , as given , and the solution to this problem is generally to produce too few initial copies of the idea . However , in the case where the indivisibility binds , the producer is still forced to provide a single initial copy , and his monopoly over the unique idea is irrelevant . Results First-Mover Advantages . There is plentiful evidence that , in prac - tice , the indivisibility of ideas is not more substantial than that of other commodities ; for example , automobile plants or shipyards . There is also much evidence that ideas flourish in competitive markets without government intervention in the form of patents and copyright . However , for books , music , and movies , it is easy to imagine that changes in computer technology that make copying cheaper and more rapid will lead to a so large as to cause x t to expand so rapidly as to flood the market and drive price to zero almost immediately . As we observed , as 3 , the revenue P 3 0 . It is worth noting that the same technological change is reducing the cost of books , music , and movies creation as well , so that 3 0 also , and this may well offset the improved copying technology . Moreover , even if we accept that the market for copies may be quickly flooded , there are still tremendous advantages in being first . We will not attempt to enumerate all of those advantages here . In the case of innovations , secrecy is an obvious method of generating a short-term monopoly . In the case of books and movies , most sales take place within 3 months of initial release . So if it is possible to keep copies encrypted for even so short a period of time , substantial revenues may be realized regardless of the quality of copying technology . Evidence from the pharmaceu1254 www.pnas.org cgi doi 10.1073 pnas .0407730102 tical industry suggests that the first-mover advantage is quite substantial , be it due to reputation effects , slow information diffusion , or simply `` capture '' of the medical profession . In any case , the evidence shows that most generic drugs , selling at a quarter of the price and being clinically and functionally perfect substitutes for the original products , never capture 50 % of the market -LRB- 6 , 7 -RRB- . This is , of course , not decisive evidence : It could be that the monopoly provided by the patent is important in building consumer loyalty that persists after the patent expires . In the case of financial securities , we do have stronger evidence on the presence of a first-mover advantage ; until the State Street Decision in 1998 financial securities could not be patented , and as documented by Tofuno -LRB- 8 -RRB- among others , there was thriving innovation driven by a strong first-mover advantage . Although imitation was rapid , the first mover successfully maintained the bulk of the market against imitators . The pharmaceutical industry makes much more extensive use of patents than other industries , and the expense of bringing a new drug to market , including the cost of clinical trials and failures , is estimated by DiMasi et al. -LRB- 9 -RRB- at $ 231 million 1987 dollars . Would not , as the industry argues , eliminating patents in that industry cause innovation to come to a screeching halt ? We should point out first that patents are only one part of government regulation of pharmaceuticals , the FDA supervision of clinical trials , the subsidy of basic research in the area , and the large government purchases of drugs being other key elements . It would be hard to make sense of a proposal that would eliminate patent protection while allowing competitors to freely make use of the results of expensive clinical trials . However , if competitors were required to choose between either purchasing -LRB- possibly at a price regulated by the government -RRB- the results of trials or conducting their own trials , a substantial first-mover advantage would be preserved . The cost of research prior to trials is heavily subsidized , and the subsidy could be increased . It should also be recognized , as we discuss below , that the elimination of patents would have a positive effect on innovation , by allowing researchers to freely use the results of others without the need to obtain patent clearances . One almost certain effect is that it would eliminate the considerable effort wasted in inventing `` work-alike '' drugs in an effort to share in a lucrative monopoly . The first-mover advantage is a form of monopoly accruing to the original innovator . A monopolist , unlike a competitor , will not allow quantity x t to expand to x c , which drops the price to zero , but will restrict output to x c 2 , which maximizes his revenues . In the limit , as 3 , output jumps almost immediately to x c 2 , resulting in a revenue to the monopolist of . If this revenue can be captured only for a fraction of time , , then the corresponding revenue is . For computational simplicity , we will focus hereafter on the case of large , although it considerably understates the benefits of competition . The firstmover advantage here may be represented by a fraction , F , representing time before competitors are able to successfully enter . Patent and copyright monopolies can be represented by F , representing the duration of the legal a fraction , protection . We have seen how , under some circumstances , there may be underprovision of ideas due to indivisibility . We turn now to the traditional solution to this problem : The government provision of monopoly through patents and copyright . That is , by granting control over how all copies of an idea are used , the government allows the patent or copyright holder to limit reproduction and restrict supply . This increases profits , and so provides greater incentive to create or innovate . There are , however , a number of problems with this solution . Sequential Innovation . Because a monopolist is scarcely likely to earn less than a competitor , it might seem that whatever the Boldrin and Levine problems associated with monopoly , government grants of monopoly for innovation at least increase the incentive to innovate . But , just as most commodities are produced by means of other commodities , so are ideas ; innovations build on past innovations -- so while raising the profit from innovation , granting monopoly on newly created ideas also raises the cost of future new ideas . Sequential innovation and the way in which patents inhibit innovation have been studied by Scotchmer -LRB- 10 -RRB- and by Boldrin and Levine -LRB- 3 , 5 -RRB- . We illustrate this with a simple example , collapsing the dynamic model introduced above into a static one in which . Utility continues to be 2 -LSB- 2 -LRB- x x c -RRB- -LRB- x x c -RRB- 2 -RSB- . A monopolist will produce x c 2 , resulting in a revenue of . A competitive innovator with a first mover advantage will get a revenue of F . Suppose that producing the new idea requires the use of N existing ideas . We imagine that each of these many ideas is small , so that the cost of producing a copy of the idea is N. Without government monopoly , there will be many copies of each of these existing ideas competing with each other , and the inventor can obtain all N of them for a total cost of . Without government intervention , this socially desirable invention will . take place , provided only that F Suppose , on the other hand , that the government-awarded monopoly applies to all innovations , and that the owners of the N existing ideas only know that is drawn from a uniform distribution over -LSB- 0 , -RSB- . Each sets a price , p i , at which they will license their invention . Then , if owners of all the other existing ideas are setting the price , p , each owner of an existing idea receives an expected revenue of N 1p pi p i. spent developing copycat drugs to get the share of a lucrative market than is spent developing genuinely new drugs . One of the worst aspects of public rent-seeking is the regulatory capture or `` monopoly creep '' it induces . In the case of regulation , it has been observed that over time the regulatory agency becomes captured by the regulated industry , and far from imposing the public interest on the industry , serves instead to enable collusion and monopolistic practices within the industry . Similarly , in the case of patents and copyrights , over time both the scope and duration of monopoly power has been increased as a consequence of constant rent-seeking . The term of copyright has risen in the United States , for example , from 28 years to 95 years ; and many areas of thriving innovation not traditionally subject to patents , such as business practices , are now patentable . So whereas in a theoretical sense it might be desirable to have copyrights and patents lasting a few months or a few years , as a practical matter , once copyrights and patents are allowed at all , their term and scope is likely to begin to creep upwards . The existence of public rent-seeking is not to say that there is not private rent-seeking as well . For example , in the absence of patents , innovators are likely to increase their reliance on trade secrecy . Indeed , one argument for patents is that they replace trade-secrecy and force innovators to reveal the secrets of their inventions . Unfortunately , as anyone who has read a patent will realize , the `` secret , '' if there is one , is rarely revealed in a useful way in the patent application . And because patents last 20 years , the only reason to get a patent is that the inventor thinks he can not keep the secret for that long . We have studied this issue in ref . 11 , showing that creating public rent-seeking is not a good way to solve the problem of private rent-seeking . Optimal Duration of Intellectual Monopoly . Although intellectual 2 , the Nash equilibrium of this game is at p -LRB- N If 1 -RRB- , and therefore the inventor must pay -LRB- N N 1 -RRB- to clear the needed rights for his own innovation , and so he innovates if he draws an innovation for which N N 1 . This occurs with probability 1 -LRB- N 1 -RRB- . By way of contrast , without monopoly the probability of innovation is 1 -LRB- F -RRB- . As the number of existing rights that must be cleared increases , the probability of innovation under monopoly is smaller than that under competition and drops towards zero . Here the additional incentive for innovation under an intellectual property regime is more than completely offset by the additional cost it imposes on innovation . As technologies grow more and more complex , requiring more and more specialized inputs , the monopoly power induced by patents and copyright becomes more and more socially damaging . Rent-Seeking . One of the key problems with government grants of monopoly is the rent-seeking it induces . That is , when governments give away monopolies , there is incentive for would-be monopolists to waste resources competing for the award . In the case of intellectual monopolies , the resources wasted by competing `` would be monopolists '' takes several forms . The most widely studied is the patent race , where too much effort is invested in innovating quickly in order to be the first to get the patent . Another classical problem is the effort wasted building `` work-alike '' innovations in order to get a portion of the monopoly . This is the case , for example , in textbooks , where every textbook is just different enough from the bestseller in the field to avoid violating the copyright . It is also the case in pharmaceuticals , where more time and effort is Boldrin and Levine monopoly may encourage socially desirable innovation , it has a number of drawbacks , as we have seen . These range from the traditional fact that monopolies overprice and undersupply to rent-seeking and the discouragement of subsequent innovation . To understand more clearly the trade-off involved with government awards of monopoly , we examine a simple example in which we abstract from rent-seeking , sequential innovation , and competitive rents . We focus only on the traditional monopoly undersupply , and ask : In a world in which ideas are of variable quality , what is the optimal level of protection , ? Unlike an earlier economics literature pioneered by Gilbert and Shapiro -LRB- 12 -RRB- , and discussed at length in Gallini and Scotchmer -LRB- 13 -RRB- , we follow Grossman and Lai -LRB- 14 -RRB- and Boldrin and Levine -LRB- 15 -RRB- in taking a general equilibrium approach in which there are many innovations . Suppose the first copy of any idea has a unit cost of creation , and the factor used in producing the first copy is abundant and inelastically supplied ; reproduction costs are zero . We continue to use u -LRB- x -RRB- 2 -LSB- 2 -LRB- x xc -RRB- -LRB- x xc -RRB- 2 -RSB- for consumer utility . The social value of the idea under monopoly is -LRB- 3 2 -RRB- and under competition 2 . Under monopoly , revenue equals ; hence , the latter is also a measure of the private value of a good for the monopolistic innovator . We let denote the fraction of the time the producer has a monopoly ; without government intervention this is F due to first-mover advantage . By providing copyright and or patent protection , the government can raise to any higher value up to a limit of 1 . There are consumers . Then ideas will be produced for which private revenue exceeds cost ; that is , 1 . In particular , without government intervention , so F , as the size of the economy grows , the quality of the marginal idea that is produced , 1 F , declines and more ideas are produced . We continue to suppose that ideas are uniformly distributed on -LSB- 0 , -RSB- . We must set 1 -LRB- -RRB- if any ideas are to be produced at all . Assuming this is the case , social welfare will be PNAS January 25 , 2005 vol . 102 no. 4 1255 ECONOMIC SCIENCES W , 1 / 2 2 1 1d 1 2 1 4 2 . The derivative of welfare with respect to D W 1 4 3 is 5 . 8 2 2 3 that maximizes social welfare Notice first that the choice of shrinks to F at F -LRB- 8 5 -RRB- -LRB- 2 -LRB- F -RRB- 3 -RRB- . Notice second that F , it is optimal to set for below 5 1 . Notice third that we can characterize the solution by multiplying the welfare F , there is a derivative by the positive amount 4 3 . For F at which 4 3D W unique * 0 , and the sign of D -LSB- 4 3D W -RSB- is negative at * . Finally , as D -LSB- 4 3D W -RSB- is also negative , it follows from the implicit function theorem that F. Hence , the optimal degree of patent -LRB- * -RRB- 0 for protection is decreasing in the size of the market , strictly so in the F. range In summary , we conclude that if the government is to grant monopolies , they should be limited , as they are , by time limits in the case of both patents and copyright . As the market expands through economic growth and trade , these limits should gradually be tightened , until eventually no grants of monopoly are necessary at all . Unfortunately this appears to be the opposite of what has happened . 1 . Romer , P. -LRB- 1990 -RRB- J. Political Economy 98 , S71 S102 . 2 . Quah , D. -LRB- 2002 -RRB- 24 7 Competitive Innovation -LRB- The London School of Economics and Political Science , London -RRB- . 3 . Boldrin , M. & Levine , D. -LRB- 1999 -RRB- Perfectly Competitive Innovation -LRB- Federal Reserve Bank of Minneapolis , Minneapolis -RRB- , Res . Dept. Staff Rep. 303 , March 2002 . 4 . Boldrin , M. & Levine , D. K. -LRB- 2002 -RRB- Am . Econ . Rev. Pap . Proc . 92 , 209 212 . 5 . Boldrin , M. & Levine , D. K. -LRB- 2004 -RRB- Int . Econ . Rev. 45 , 327 350 . 6 . Caves , R. E. , Whinston , M. D. & Hurwitz , M. A. -LRB- 1991 -RRB- Brookings Pap . Econ . Activity Microecon . 1 48 . 7 . Congressional Budget Office -LRB- 1998 -RRB- How Increased Competition from Generic Drugs has Affected Prices and Returns in the Pharmaceutical Industry -LRB- The Congress of the United States -RRB- -LRB- mimeo -RRB- . Discussion Our own conclusion , based on empirical as well as theoretical considerations , is that on balance it would be best to eliminate patents and copyrights altogether . We have seen that markets for ideas are not so different from other markets . At one time , government grants of monopoly were widely used as a revenue extraction mechanism , and this is still true in the developing world today . Today we are skeptical about government monopolies . The government monopolies in Eastern Europe not only produced fewer and lower-quality goods at greater cost , but managed to do greater harm to the environment in the process . In developed economies , we have gradually replaced inefficient government grants of monopoly with more efficient mechanisms . Although many economists would not recommend eliminating patents and copyrights altogether , all recognize a strong need for reform . We suggest that insofar as it is desirable for the government to provide extra incentives for invention and creation , this is not best done through grants of monopoly , but rather through proven mechanisms such as subsidies , prizes , or monopoly regulated through mandatory licensing . Just as the world has used the World Trade Organization process to gradually harmonize a lower international level of tariffs , increasing greatly the benefits of the free market , so too it should be possible through international collaboration such as TradeRelated Aspects of Intellectual Property Rights -LRB- TRIPS -RRB- to harmonize substantial reductions in patent and copyright protection , greatly increasing the benefits of free trade in ideas . This work was supported by National Science Foundation Grants SES 01-14147 and 03-14713 . 8 . Tofuno , P. -LRB- 1989 -RRB- J. Financial Econ . 3 , 350 370 . 9 . DiMasi , J. , Hansen , R. , Grabowski , H. & Lasagna , L. -LRB- 1991 -RRB- J. Health Econ . 10 , 107 142 . 10 . Scotchmer , S. -LRB- 1991 -RRB- J. Econ . Perspect . 5 , 29 41 . 11 . Boldrin , M. & Levine , D. K. -LRB- 2004 -RRB- J. Monetary Econ . 51 , 127 160 . 12 . Gilbert , R. & Shapiro , C. -LRB- 1990 -RRB- RAND J. Econ . 21 , 106 112 . 13 . Gallini , N. & Scotchmer , S. -LRB- 2001 -RRB- in Innovation Policy and the Economy , eds . Jaffe , A. , Lemer , J. & Stern , S. -LRB- MIT Press , Cambridge , MA -RRB- , Vol . 2 , pp. 51 78 . 14 . Grossman , G. M. & Lai , E. L. -LRB- 2002 -RRB- International Protection of Intellectual Property -LRB- National Bureau of Economic Research , Cambridge , MA -RRB- . 15 . Boldrin , M. & Levine , D. K. -LRB- 2004 -RRB- Intellectual Property and the Scale of the Market , www.dklevine.com papers scale22.pdf . 1256 www.pnas.org cgi doi 10.1073 pnas .0407730102 Boldrin and Levine

O B O O O O O O O O O O O O O B O O O O O O O O O O O O O B O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O B O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O 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