Gene Quinn: Patent Twit of the Week

Gene Quinn, a patent lawyer and IP-hawk, has recently challenged the anti-IP movement — in the tone of a belligerent drunk announcing he can lick anyone in the bar– to back up its contentions with facts and arguments. Such facts and arguments are lacking, he taunts (in an Eric Cartman voice?), for the obvious reason that none exist.

When people like Stephan Kinsella call his bluff, Quinn generally manages to weasel out of it. Most recently, Quinn was scheduled to debate David Koepsell, but at the last minute cancelled because he (ahem) got sick. Quinn, in lieu of the original debate format, later participated in a pathetic exchange of soundbites on the Laura Flanders show.

The weightiest of Quinn’s “unanswerable” points is the supposed insufficiency of marginal cost-based pricing for recouping high R&D costs.

Quinn’s argument assumes an obsolete industrial model, and ignores the extent to which the capital-intensiveness and overhead cost of innovation itself are themselves affected by IP. Patents can tip the balance between alternative business models, promoting an artificially high-capitalized, high-overhead, bureaucratic model of R&D.

Patents are one way of dealing with R&D cost. But another way is modular design, which economizes on development cost by reusing the same R&D effort for a particular module or platform over a wide family of products.

Open source, P2P design models may also be considerably cheaper because they are more agile (see Eric Raymond, “The Cathedral and the Bazaar”); for example, homebrew CNC machine tools generally achieve Factor 10 or Factor 20 cost reductions over their proprietary equivalents.

Patents also tip the balance toward less agile forms of production in another way: the legal process of securing a patent is an enormous outlay that can only be amortized by large-batch production.

And the process of gaming the patent system diverts R&D dollars into some very wasteful avenues. For example, most drug R&D cost goes, not to developing the version actually marketed, but to securing patent lockdown on all the major possible variants (so a competitor won’t market a rival drug).

Artificial property rights are a source of additional capitalization costs and overhead.

Also, studies have shown that the total productivity benefits from the cumulative effects of incrementally tweaking designs, and all the other Hayekian stuff that goes with a tinkerer observing a technology in operation and fiddling with it, outweigh those from major generational leaps. So an IP regime that incentivizes major generational leaps, while erecting transaction costs against derivative development, seems of questionable benefit.

Defenses of both patents and copyright based on the inadequacy of marginal cost pricing to recoup up-front outlays are wrong-headed in another way.

The only effect of abolishing IP is to do away with monopoly rents from design or content ownership as such. It doesn’t affect the rents that result from the transaction costs of setting up production, or from being first to market and knowing one’s market better than the competition.

These things, which all fall under the head of what Chris Anderson calls “freemium,” are sources of value that would exist even without rents from IP as such. So it’s still possible to make money from being first mover, and from the authentication advantages that come with being identified as the product’s developer; you just can’t make as much money from it.

High among “freemium” services, for the majority who value time and convenience along with bare price, is authenticity: buying a copy that’s certified to be complete, defect-free, and in the format you need.

And in general, the person who originally develops a product is likely to have a better knowledge of his market, and be in a better position to profit from an ongoing relationship with his market as he develops products geared to their particular needs — especially if he also serves the market through customization and customer support.

Shakespeare worked without copyright, which meant he made money by actually performing the plays with his theater company. That meant, in turn, that he got lots and lots of little piles of money from keeping on writing plays and performing them, instead of collecting a big pile from a one-hit wonder.

BTW: Most of Shakespeare’s work was done on the folk culture model, with heavy reliance on mashups from other storytellers, and hence would be illegal under modern copyright law.

In the realm of physical production, the first company to develop a new product will have first-mover rents for the time it takes to duplicate the process. After that, it will have rents from customer goodwill. That goodwill will include the common sense assumption that the company will be best at offering upgrades to a product it originally developed, and will probably be the most reliable source of customer support.

To sum up: the producers who find themselves being driven out of business by competition based on marginal cost are generally the corporate dinosaurs who CAN’T survive without monopoly rents on IP, because they really are too stupid to think of any other way to make money.