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Hi, I’m Brad Feld, a managing director at the Foundry Group who lives in Boulder, Colorado. I invest in software and Internet companies around the US, run marathons and read a lot.

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Empirical Evidence That Software Patents Stifle Innovation

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A few weeks ago, Slashdot pointed out that a Critic of Software Patents Wins [the] Nobel Prize in EconomicsI finally got around to reading the paper that Slashdot referred to – Sequential Innovation, Patents, and Imitation by James Bessen and Eric Maskin (the aforementioned Nobel Prize winner.)  The paper was written in 1999 and is an MIT Economics Department Working Paper #00-01 (one of first working papers to be published at MIT in 2000.)

The paper is a crunchy one (lots of equations that I wasn’t able to follow now that it has been 20 years since I took an economics class, although the abstract summarizes things nicely (as all good abstracts should).

"Abstract: How could such industries as software, semiconductors, and computers have been so innovative despite historically weak patent protection? We argue that if innovation is both sequential and complementary—as it certainly has been in those industries—competition can increase firms’ future profits thus offsetting short-term dissipation of rents. A simple model also shows that in such a dynamic industry, patent protection may reduce overall innovation and social welfare. The natural experiment that occurred when patent protection was extended to software in the 1980′s provides a test of this model. Standard arguments would predict that R&D intensity and productivity should have increased among patenting firms. Consistent with our model, however, these increases did not occur. Other evidence supporting our model includes a distinctive pattern of cross-licensing in these industries and a positive relationship between rates of innovation and firm entry."

Much of the stuff I read on software patents generally ignores (or hand waves) over the empirical data as well as any rigorous quantitative analysis of the real economic dynamics of software patents.  There is also an excellent and short section that discusses the pattern of cross-licensing entire patent portfolios within the software industry.

I also found a couple of other great software patent sites as a result of this, including the Research on Innovation Working papers (many papers by James Bessen and Michael Meurer discussing software patents), an overview of Bessen and Meurer’s upcoming book titled Patent Failure: How Judges, Bureaucrats, and Lawyers Put Innovators at Risk (Princeton University Press: March 2008), and the summary from a conference from 2006 titled Software Patents: A Time for Change?

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