The world
continues to combat the Wuhan virus unleashed by China. The world at the moment
grapples with two problems. The first is the efforts to discover a vaccine or a
cure for the COVID-19 and the consequent distribution of the same to the global
population. Secondly, it is to revive the economy which is suffering the
lockdown. Theorists from Schumpeter onwards have viewed the restarting the
economy being possible only through innovation. As the economy struggles, it is
the new innovation that infuses life into the economy and enables it to build
on the V shaped or U shaped or whatever shape the curve might posit itself to
be.
Yet in the twin
challenges that the society finds itself confronted with, lies a commonality
and a challenge so as to speak. It is about innovation and protection of
innovation and consequent prospect of monopolizing the innovation. Take the
instance of a prospective discovery of vaccine or cure for the Chinese virus. The
firm engaged in the discovery would seek to monetize the same. It implies at an
extreme level, the retention of patents associated with the cure or vaccine. If
the patents were to be monopolized by the firm, it would be difficult to ensure
mass distribution among the population. At another extreme, are talks about the
new drugs being made patent free thus enabling free or low price distribution
of the drugs or the vaccine to the common man or woman across the world? The latter
would apparently disincentives the producers from making efforts in discovering
a new drug or a new vaccine. There is a danger of falling between two stools
one of the tragedy of anti-commons while the other being tragedy of commons.
Such a scenario
while posing a challenge does offer solutions to emerge out of the same. In the
normal course of things, the governments have an option of compulsory
licensing. This in all probability will happen once the new vaccine is
discovered for the COVID-19. In case of non-application of compulsory
licensing, it is possible to resort to parallel imports. In all likelihood, the
state of panic and the mind-set of the government, the licensing will be
resorted to. The governments will fix a royalty which will be paid into the
pool to enable it to go to the patent holder. All drug firms will encouraged to
produce the drugs on a mass scale as it seeks to combat the epidemic. There is
a likelihood, the licensing would be in proportional to the political
relationship the countries have with the discoverer country. If for instance,
US firms discover the cure or the vaccine, it is possible for those countries
which are close to US politically, militarily or economically to get the first
right of use of the cure or the vaccine.
While compulsory
licensing or parallel imports might enable the distribution of the prospective
COVID-19 vaccine, it would be interesting to see patent protection for
innovation to revive and revitalize the ailing economies all over the world. in
the past, compulsory licensing or patent pooling have been used to revive or
kickstart an industry affected by holdouts. An example would be the US aircraft
industry in its initial stages. It was only the Congressional intervention
through creation of a patent pool that enabled the aircraft industry to
commence operations and enable US to become a world leader in aircraft
manufacturing.
Yet in France,
when photography first came in, it was not compulsory licensing or patent
pooling that drove the industry. The French government bought out the patents
relating to the photography industry and licensed them for free use. The move
what Michael Kremer and other economists term as patent buyout spurred the
industry resulting in sharp increase in innovations and subsequent filing of
patents on improvisations in the industry. Michael Kremer seeks to use this
lesser known but perhaps in his beliefs an effective tool to circumvent patent
driven holdouts.
To Kremer, the ideal way out to generate a
virtuous cycle of innovation would be to encourage incentivise innovators. The innovators
are confronted with the dilemma of implied demand uncertainty. There would be
perhaps a utility for the innovation but no certainty with respect to the same
for a specific innovation. In this scenario, the innovators would have to
search for price discovery. This solution is relatively easier given innovators
are ready to offer their bidding in the market. Yet, there are others who would
not be keen to offer their products at the market and prefer to hold out if it
is proven their innovation might be a strategic or key input in another
innovation. This is often observed in pharmaceutical industry. The innovator
might not be able to measure the consumer surplus and prefer to hold out
expecting a higher willingness to pay for the innovation. It is in this context
that the Kremerian proposition comes into play.
Kremer suggest
an auction to discover the prices. The government must intervene in the
innovation market and buy patents that might be of critical input in other
innovations. As the oft repeated example goes, the 3D printing took off and
began to assume a shape of the mass product only when the patents expired
making those inputs generic. If the government had bought out the patents much
earlier, the industry would have taken off perhaps a decade or two earlier. Yet,
the government too would be in the dark which innovation would be of use and
which would result in social waste. If the government pays high, it might be
deemed rent-seeking while anything less would perhaps erode the producer
surplus thus a disincentive for future innovation. In fact, producers might be
reluctant to offer their innovation for auction or even exit from the market.
Secondly, if the government is going to bid for a specific innovation, there
might be cartelization to increase its prices. Therefore, the price discovery
has to balance multiple things. The private players are also to be allowed to
bid for innovation so that they can buy the rest of the patents on offer and
also to enable government discover the natural prices of the patents under the
hammer.
The government
might want to pick only a select few information of which might not be aware to
other bidders. Yet it might open up to the charge that private players would be
forced to pick up the leftovers so as to speak. There is also a danger of
adverse selection on the part of the government. Yet Kremer does point out the
possible values that could be offered to the patent holders while purchasing
the same. Irrespective of the operational constraints, the idea would be worth
exploring for as an alternative to compulsory licensing or patent pooling.
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