Intellectual Property Usage as a Determinant of Market Structure

Abstract

Intellectual property (IP), such as patents or copyrights, forms the basis of economic policy to encourage innovation, creativity, and growth. In this thesis, I show how the strategic usage of IP by rights holders plays a crucial role as intermediary between economic fundamentals, such as public policy or industrial characteristics, and economic outcomes, such as the structure of markets or the pace of innovation in an economy. Chapter 2 demonstrates the importance of IP strategy as an intermediary in the context of patent–based measures of innovation. In a theoretical model of innovation, IP, and market interaction, I show that citation–weighted patent counts, the most common innovation measure, are generally valid as an innovation proxy only if the profit motive for innovation is complementary to the protection motive for IP usage. Otherwise, observed patenting could decrease in response to changing economic fundamentals even as innovative effort is increasing, and the inferred relationship between economic forces and innovation will be incorrect. Chapter 3 tests these predictions empirically for the relationship between competition and innovation, an enduring interest of economists and policymakers. Consistent with the predictions of the model, I show that competition and citation–weighted patent counts have an inverse–U relationship, but that competition has a generally negative effect on research and development activity. Therefore, changes in observed patenting only correlate with changes in innovation at high levels of competition, when the likelihood of innovative success is low; otherwise, patent counts diverge from innovative effort and are invalid as a proxy. Chapter 4 examines the effects of copyright infringement on the market for recorded music. I show that music piracy has a modest negative effect on sales overall, but the size and magnitude of that effect differ across artists and sales format. The differential effects of piracy impact record labels’ optimal IP licensing strategy in the market for music streaming, determining market structure and the balance of market power. Taken together, the thesis highlights the important role that IP strategy plays as an intermediary between economic fundamentals and economic outcomes of interest, suggesting implications for economic policy and our understanding of innovation and creativity.