11.13 notes

November 13, 2015 notes for Nov 13, 2015

1. discussion of patent breadth and length

• monopoly: reminder that can use Net Present Value as way to evaluate

– can add up profits over time, but diminishes with length, as profits years in the future carry less value by π/(1+ δ)t in year t with discount factor δ.

• general tradeoff in that greater length and breadth are good for firms, bad for others

– for consumers, lower prices obviously raise consumer surplus but also lessen deadweight losses.

– additional gains if the patent is not a one-off idea but instead provides the groundwork for additional technology and product improvements. as long as prevented by a patent society benefits neither from π nor from consumer surplus

• patent rush: winner-takes-all can lead to too much innovation, not too little

2. Case study: Gentex

› side note: entrepreneur Fred Bauer bought existing publicly traded firm: small and not in a growth market so within his budget. no need to involve investment banks, provided a way to fund R&D and low-cost physical assets (small factory etc)..

• monopoly (in their case, the now-pervasive autodimming mirror)

– example of actual patent

– core patents mid-1980s, first related product 1987. so now long expired.

• so don’t be greedy! 

limit pricing in action – remember our duopolist model where (when cost curves pan out the right way) a monpolist can price to make entry unprofitable while still earning more than duopolist profits

– prime potential competitor Donnelly (biggest US mirror manufacturer) just down the street

› not unusual! – think Silicon Valley

– learning curve (Boston Consulting Group, which by the late 1960s had built it into a lucrative consulting business)

› a gel layered between glass is a simple idea, but actually getting two pieces of glass sufficiently parallel to prevent banding is not

› initial yields awful, if only are good then have to throw away materials after putting labor into them. getting yields to 95% (and then higher) took time

› any new entrant has to pay not just for the production facilities but will lose money for a couple years while they get yields up.

– meanwhile Gentex can preserve margins while lowering price a bit more, year after year: with luck they’ll present a moving target that no firm would try to hit.

3. To be continued!

• what to do for the day when patents expire??