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Many people take the American Patent System for granted; some conceive It to be a device to enable them to get rich quick; others accept It for what It was intended to be-an encouragement to the progress of science and useful arts; “while a few have found in it an Immunity from prosecution which enables them to promote selfish anti-social ends.

This treatise is a study of the American Patent System: an economic Interpretation. There are extensive source materials available for a study of the patent system, among them the printed hearings of government Investigating committees and many articles in technical and professional Journals and periodicals. Materials from these and other sources have been collected and classified, and the various practices tint characterize the patent system have been described. On these bases, conclusions relevant to public policy have been attempted in the light of prevailing economic theory. Some of the conclusions are noted below.

The patent system is not an end in Itself; it is only the means adopted by progressive societies to obtain for themselves the benefits of a dynamic economy. These benefits accrue from Innovation. The desire for economic reward is the most Important force motivating inventors and businessmen, and the operation of the patent system tends to assure more innovation, earlier innovation, and continuous innovation by increasing the prospect of a satisfactory return from the development and exploitation of an invention.

Although originally patterned after the English model, the American patent system has developed Into an Institution in its own right, until today it is the most liberal and probably the most effective agency of its kind. As such It differs in several respects from the patent systems of other countries. Patents are granted only to the true inventor in the United States; patents are granted without adverse interests having an opportunity to appear in opposition; and taxes, nullity suites, compulsory working and compulsory license laws do not detract from the patent monopoly. The liberality of the patent laws helps to explain the fact that Americans are the most inventive people in the world.

It is often contended that there is a conflict between the patent laws and the anti-trust laws. This is not true. The patent grant of monopoly exists as an acknowledged exception to the general condemnation of monopolies. The patentee may exploit his invention as he wishes so long as he stays within the limits determined by the claims of his patent and the general patent law. It is only when he oversteps those bounds that he finds himself in conflict with the anti-trust laws. Incidentally, it appears that the uniform application of the anti-trust laws to all monopolies should be reconsidered. Some monopolies, by making possible large-scale operations, reduce the per unit cost of production. Such monopolies should be nurtured by the government but so regulated as to guarantee that savings will be passed on to Consumers. In other fields, where large-scale operations do not make lower costs of production possible, competition should be enforced, for competition tends to guarantee consumers the greatest amount of goods at the lowest prices.

A patentee has the choice of exploiting his invention himself, of selling it outright to someone else, or licensing others to use it. If a patentee elects to exploit his patent by licensing others to work it, the terms of the license agreement can be made to fit the needs of each particular case. One of the important parts of the present study is a deductive analysis of the effects of various possible royalty arrangements. Seven representative cases have been considered. The results appear to warrant a subsequent inductive study of actual license agreements.

The monopolistic competition price analysis, developed by Professor Edward Chamberlin, is peculiarly applicable to the conditions brought about by the operation of the patent system. These conditions are petition between substitute "products," competition among a limited number of firms making differentiated products, and restrictions upon the tree entrance of new competitors. The patent system appears to result in restricted output, higher prices, and profits above the competitive level. On the other hand, new ideas are presented to the public at an earlier date and in greater abundance, so that consumers have a greater variety from which to choose. Variations in consumers' wants are provided for more completely and at an earlier date.

Industrial research laboratories of big business units have become an increasingly important source of inventions in recent years. Most of the inventions made in corporate research laboratories are developmental inventions; very few basic, now ideas come from industrial research laboratories. Most of the radically new inventions that result in new industries are made by independent inventors. Basic Inventions tend to increase the demand for the factors of production: developmental inventions tend to reduce the demand for the factors. Both types are necessary if equilibrium is to be maintained in a dynamic economy. Therefore, as Industrial research becomes more and more Important, special government aid in the encouragement of basic inventions may become necessary.

Patents can be used to control international competition. A patent taken out in the inventor's home country protects the domestic markets from foreign competition. In effect, it establishes a private tariff for the sole benefit of the patentee. A patent taken out in a foreign country reserves the markets of that country for the patentee. Patents taken out in foreign countries are often the consideration in negotiating international agreements between business firms. Such agreements are resorted to in ln effort to overcome nationalistic restrictions upon industry and trade, as the basis for the exchange of technical information, and for the purpose of allocating world markets. In so far as patents are used to limit the free flow of goods in international trade, free competition is destroyed, and consumers are prevented from purchasing to their best advantage.