By: Paul Morinville
Patents are often referred to as monopolies. But that is a fundamental misunderstanding of how patents work to enhance competition. The truth is that a patent is a natural anti-monopoly.
In a functioning patent system, inventions become investible assets when they are patented, and the value of the invention increases as market demand increases. Because of the direct relationship between market demand and patent value, a patented invention can attract enough investment to compete with entrenched incumbents in the market for the invention.
This effect introduces new competitors into the market who are protected against incumbents for a long enough period that they can survive after the patent expires. Thus, patents act to increase competition by introducing new competitors into the market and thereby create competitive markets. But perhaps even more important, some inventions deliver a strong dose of creative destruction to monopolistic incumbents who did not innovate fast enough, causing those companies to fail and clearing the market of dead weight, thus opening the market to innovative new companies.
Patents are the ultimate anti-monopoly in a free market. But for this to work, the market must function undisturbed by crony laws and regulations. A patent must be a presumed valid “exclusive Right.”
The Exclusive Right Creates Market Scarcity
Like any free market, the value of an invention is determined by variations in supply and demand. Demand for an invention cannot be increased or decreased for an invention except by market effects outside of the invention. But supply is different.
If supply for an invention is unlimited, the value of the invention is zero no matter how high demand goes. Therefore, an invention with unlimited supply has no value and can never attract investment. The problem of unlimited supply was corrected by the Founders, who wisely constructed a patent as an “exclusive Right” in the U.S. Constitution. (The word Right is used only once in the Constitution and capitalized in the original.)
The exclusive Right creates scarcity in the market for the invention—it prevents anyone other than the inventor from commercializing an invention protected by a patent. This limits supply so that demand can act to increase the patent’s value. Thus, the exclusive Right creates an investible asset that can be collateralized to attract enough investment to commercialize an invention and supply it at a level that meets demand.
Read more >> http://www.ipwatchdog.com/2019/04/09/startups-with-patents-are-the-ultimate-anti-monopoly/id=108102/
