Copyright and Patent Protection in the Free Market

by Anthony Williams 

The Reasons for Copyrights and Patent Protection

In analyzing the economics of the purely free market, why do most successful industrial societies offer patent and copyright protection, even though these protections enable sellers to charge higher prices? Can the sellers charge whatever they want? Why, or why not?

I offer some answers in this blog entry. Copyright and patent protection is offered in most successful industrial societies; because, it affords the innovators the opportunity to recoup any production development cost. Otherwise, there may be fewer innovators as these people and companies fail to make back their monies.

For Instance, let’s say Microsoft developed new software but could not obtain patent protection for it.  Other companies may make a profit selling that new software. But, Microsoft will start off in the negative, and therefore will lose money since they would not have market power. As a result, their investment will become a sunk cost. That would discourage innovators, and thus, such a society may not thrive. (Frank & Bernanke, 2009)

Copyrights and Patent Protection gives Market Power

However, these sellers may not charge whatever they want; though, market power give them the ability to set the price of their product. Even so, “all [they] can do is pick a price-quantity combination along [their] demand curve” (Frank & Bernanke, p. 275).

For example, in the scenario aforementioned, if Microsoft retained a patent for its newly developed software it may have market power. But, in good judgment may set a price in relation to the demand curve (the price that its customers are willing or able to pay for said product). Because, if the price is set too high, most likely a downward-sloping demand curve is imminent, and a decrease in demand (Frank & Bernanke).

Copyrights and Patent Protection Encourage Innovation

In conclusion, successful industrial societies offer patent and copyright protection to encourage innovation. And, although these protections enable sellers to charge higher prices, there is a limit to what they can charge. Because, selling price should be within the range that customers are willing and able to pay.

References

 Frank, R. H., & Bernanke, B. S. (2009). Microeconomics 102 (3^rd ed.). McGraw-Hill/Irwin, Inc.,