Patent
What is Patent?
A patent is a government-granted exclusive right to make, use or sell an invention for a limited time, in exchange for publishing how the invention works.
Ideas are cheap to copy and costly to produce, so without protection an inventor who spends heavily on research watches imitators sell the same product at the cost of manufacturing alone, and the research never gets funded. A patent answers that by granting exclusivity for a fixed term, twenty years from the filing date for a utility patent in the United States, in return for a public description detailed enough for others to build on. The exclusivity is a legal barrier to entry, and it is meant to create market power: the holder prices above marginal cost, and that markup is how the research is repaid. It is a deliberate trade of static inefficiency, the deadweight loss while the patent runs, for dynamic efficiency, the inventions that would not otherwise exist. A patent covers an invention, unlike a copyright, which covers an original work of expression, or a trademark, which covers a name or logo identifying a seller.
Patent: a worked example
Suppose a patented medicine sells for $200 per course of treatment while producing another course costs $6. At that price 500,000 courses are sold a year, giving the maker $100 million in annual revenue, which pays back the research and the failed candidates that never reached patients. When the patent expires, generic manufacturers can copy the formula, and price falls toward the cost of production, say $10. Now 2 million courses are sold and the sellers share $20 million. Consumers gain and the quantity supplied quadruples, but the reason anyone funded the research was the twenty years before that happened.
The mistake students make with patent
Students say a patent gives a firm a monopoly, then conclude that the outcome must be inefficient and the patent a mistake. A patent gives exclusivity over one invention, not over a market: several patented drugs can treat the same condition, and the holder may face hard competition. The market power is also the point rather than a flaw, since the higher price is the payment that makes inventing worthwhile, which is why patents expire instead of running forever.
Patent questions
How long does a patent last?
In the United States a utility patent runs for twenty years from the date the application was filed, not from the date it was granted, and maintenance fees must be paid to keep it in force. Design patents and the rules in other countries differ, and effective protection is shorter whenever years are lost to examination or regulatory approval.
Why do governments grant patents if they create market power?
Governments grant patents because an invention is expensive to create and cheap to copy, so without exclusivity a competitor could sell it at production cost and nobody would fund the research. The deadweight loss during the patent term is accepted as the price of getting inventions that would otherwise never be made.
What is the difference between a patent, a copyright and a trademark?
A patent protects an invention, meaning a new and useful process, machine or composition, while a copyright protects an original work of expression such as a book, song or program, and a trademark protects a name, logo or slogan identifying the source of a product. Patents run for a fixed term from filing, copyrights last far longer, and a trademark can be renewed indefinitely while it stays in use.
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