standard (or more accurately, MPEG-2 because it is a second version) is used to compress video data. It has become the industry standard for all devices that store or transmit image data (televisions, DVD players, etc.) and has been incorporated into more than 300 million machines. This figure can be expected to increase six-fold by 2006 and the estimated value of products using the MPEG-2 standard will be more than $500 million by the same date [Futa, 2002]. Apart from the University of Columbia, the owners of the patents in the pool are eight major electronics and telecommunica- tions companies, including Sony, Lucent and Mitsubishi. They themselves use the standard they developed. In addition, there are almost 500 licensees.
The MPEG-2 pool is a model in terms of prevention of anticompetitive effects. It only contains patents that are essential to the compression technology, and every effort is made to reduce the number of patents in the pool. Management of the pool and licensing are handled by a speciali- zed agent, MPEG-LA. The agent
selects new essential patents as the technology evolves. It is also responsible for removing patents that have become nonessential. The "essentiality" of a patent, which determines whether it should included in or excluded from the pool, is evaluated by independent experts. The rights holders receive income proportio- nal to their share of patents in the pool. At end-2002, the pool contained 525 essential patents, which is five times more than at the outset. They belong to 22 compa- nies, i.e., almost triple the initial number. MPEG-LA is also required to sell the license on a nondiscrimi- natory basis to anyone who requests it. Every patent can also be licensed separately from the others. If, for example, a patent has another application outside of the standard, the user does not have to buy all the patents in the pool, including those for which he has no use. The members of the pool also agree to cross-sell their own licens- es to each other separately. This independent licensing require- ment, imposed by the competition authorities, is a good way of ensuring that the patents in the pool enhance welfare [Lerner and Tirole, 2002].
On the advantages and disadvantages of licenses, particularly in terms of their anticompetitive effects, we have seen in this section that economic analysis takes a favorable view of licensing. It suggests that the granting of an intellectual property right is usually in the general interest. It also provides methodical considerations for examining situations on a case-by-case basis. It should be stressed, however, that these considerations are based necessarily on simplifications. One of these is the dichotomy between vertical and horizontal relationships. This is key to evaluating the benefits of licenses, but can be difficult to determine. Innovations are rarely pure substitutes or pure complements. A patent may contain both complementary and substitutable elements. Moreover, from a dynamic point of view, a complement may become a substitute. This is the case with operating systems and Internet browsers. Netscape is a complement, not a substitute, for Windows. However, many, including Microsoft, believe that this type of program could one day become middleware that could replace some operating system functions.
"No economist, on the basis of present knowledge, could possibly state with certainty that the patent system, as it now operates, confers a net benefit or net loss upon society […] If we did not have a patent system, it would be irresponsible [...] to recommend instituting one. But since we have had a patent system for a long time, it would be irresponsible, on the basis of our present knowledge, to recommend abolishing it."
These statements were made in a study on patents commissioned by the U.S. Congress in the late 1950s [Machlup, 1958]. Since then, new empirical and theoretical knowledge has emerged. This book has described and summarized these developments. Do they lead us to revise Machlup's view?
Should intellectual property be abolished?
The current dispute over intellectual property began with the extension of patents to biotechnology products, which raised fears of the privatization of genetic inventions and the appropriation of the Southern Hemisphere's genetic resources by corporations from rich countries. It spread with the IT and Internet boom, which pitted supporters of freeware and open architecture against proponents of proprietary products.
A similar anti-patent and anti-copyright movement arose in the third quarter of the 19th century. It succeeded in abolishing patent laws in the Netherlands for 40 years and almost eliminated protection for inventions in Britain and Prussia.
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The abolition or preservation of intellectual property protection is thus not just a purely theoretical question. To decide on it from an economic viewpoint, we must be able to assess all the consequences of protection and determine whether the total favorable effects for society outweigh the total negative effects. Unfortunately, this exercise is no more within our reach today than it was in Machlup's day.
On the contrary, economic analysis has increased the complexity of such an evaluation by bringing to light previously unsuspected costs and benefits. Three major adverse effects have been identified by economists since the mid-20th century: patent races, the cumulative nature of technical and artistic progress, and the tragedy of the anticommons. Let us recapitulate the basic principles of these three ideas. Firstly, the prospect of obtaining a temporary monopoly encourages too many innovators to pursue the same research projects. They enter a race to patent, which needlessly absorbs a share of the available economic resources. Secondly, cumulativity refers to the fact that creation and invention are based on the knowledge that precedes