We’re pleased to bring to you a guest post by Avani Bagaria, analysing the benefits and pitfalls of using prizes as an alternative to patents for incentivsing innovation. Avani is a 5th year student at Jindal Global Law School, Sonipat.
Critiquing Prizes as an Alternative Mechanism for Promoting Innovation
Avani Bagaria
Introduction
Under the prize mechanism for encouraging innovation, the inventors are awarded through the means of cash prizes rather than granting a monopoly over the usage of their invention for a certain period of time. Prize mechanism simply requires the inventors to put out their invention in the public domain in exchange for a certain prize which is rewarded to them by the government. Then, the invention of the inventor is used most efficiently in the market for promoting social welfare. The idea of eliminating monopoly distortion is envisaged in this alternative method of promoting innovation.
The origin of this mechanism can be traced back to the seventeenth and the eighteenth century where prizes were granted for technological inventions. One of the most famous prizes of the seventeenth Century was the “Longitude prize”, which was formulated by the British parliament to be awarded to an invention which could precisely determine the longitude at sea. This trend of giving out prizes for stimulating inventions kept on increasing in the eighteenth century and one such example was the reward mechanism which was used in Lyon, France for promoting technological development in the textile industry. These prizes were financed by the Grand Farbrique textile guild and through the taxes which were collected from silk import in Lyon. This mechanism turned out to be one of the most powerful methods of increasing inventions of public goods during that era.
However, this mode of incentivisation started fading out from the nineteenth century due to the introduction of intellectual property rights. The benefits attached to this mechanism, though, has revived the interest of various governments and policymakers around the world to reuse this model to protect sectors which play an important role in promoting public welfare.
Arguments in favour of prize mechanism
Firstly, the prize mechanism promotes the sharing of knowledge of the inventor with the public for the benefit of society at large. The restriction on the use of knowledge is one of the major drawbacks of the patent system as it results in granting unfettered power to the inventor to use his invention in a monopolistic manner. The fatal impact of the usage of this power can be seen in the pharmaceutical sector, where life-saving medications have become unaffordable due to its monopolization. This can be observed from the manner in which the average price of insulin has almost tripled in the U.S. between 2002 to 2013. One of the prominent reasons behind this spike in the price has been the autonomy which the pharmaceutical manufacturers have been given under the laws to decide the prices as well as the power to raise them according to their choices. Therefore, it can be concluded that the prize mechanism eliminates this act of monopolization in the market by making the knowledge of the inventor a part of the public domain.
Secondly, the prize mechanism helps in eliminating the dead-weight loss which is generally caused by the patents. Due to the monopolization which happens due to patents, the inventor gets the power to sell the product at a high price. This high cost reduces the purchase of the invention in the market, which in turn results in causing ‘dead-weight loss’. The prize mechanism prevents this loss from happening as it removes the aspect of monopoly pricing in the market. It eliminates the monopoly pricing through delinking the price of the invented product and the amount of capital invested by the inventor in the research and development of the invention by giving the inventor the cash prize instead of the power to have exclusive rights over its inventions. This de-linkage due to this model results in making the inventions cheaper as well as widening the availability of the invention in the market to maximize consumer welfare.
Thirdly, this mechanism provides the government the means to channelize the invention towards creating solutions to the problems which require urgent redressal. These ‘glittering-prizes’ also grant the government the power to induce inventions in sectors where the inventors generally do not invest their time and energy in developing something for the advancement of that sector. There are also certain innovations where the social value of the innovation is a lot more than its private value. In such situations, the prize mechanism can induce the inventors to invest their capital and time even in those inventions which are of a higher social value rather than a higher economic value. This argument can be further substantiated through the example of the ‘me-too’ drugs as well as other lifestyle drugs which have a higher economic value for the manufacturers in the pharmaceutical sector. These drugs yield more profit as compared to the “life-saving” drugs and hence, the inventors are induced to produce them. But, through the prize-mechanism the government can solve this problem by shifting the inventions in the pharmaceutical sector from the ‘me-too’ drug to the ‘life-saving’ drug.
Arguments against prize mechanism
Firstly, the money for the prize mechanism is mostly raised by the government from the tax that is collected from the taxpayers of the nation. This diversion of money to award the inventions results in a tax distortion effect and in turn increases the plight of the taxpayers. Therefore, even though this mechanism reduces the dead-weight loss which is caused due to patents, the implementation of such a model results in increasing the economic burden of the people by increasing their tax liability.
Secondly, the organizational and bureaucratic framework required for planning and overseeing the prize mechanism would result in increasing the cost of implementing this mechanism and would result in the further investment of the taxpayer’s money. Before any prize mechanism is formulated, it would be required for the prize granting agencies to decide upon the amount of the prize as well as determining the eligibility to claim it. This would require them to study the market trends of the sector nationally and internationally in which they would want to introduce the mechanism. Subsequently, they would also be required to manage the entire prize mechanism, which would include the task of managing the contest, choosing the winners and giving out the inventions. Therefore, the prize mechanism is not very economical.
Thirdly, it will always be a difficult task for the government to estimate the correct economic and social value attached to the invention. This will result in creating a situation where the inventors would receive an under-value amount for their inventions. This failure to reward the inventors appropriately would severely hinder the scope of future innovations as the inventors would not be willing to invest their time and money in R&D for an under-valued prize. An example to support this argument would be the undervaluation of the monetary award which was given to the atomic-energy innovators for the military usage of atomic energy under the U.S. Atomic Energy Act of 1946. It was later on found that these inventors could have earned a lot more if they had patented their inventions.
On the other hand, there could be an opposite scenario, where the government could over-value the prize. In such a situation, a lot of players would invest a large amount of capital for the same invention for increasing their chance of winning the over-valued prize. However, it would only be one of these players who would be awarded the prize and this situation would result in the creation of wasteful R&D. Therefore, this mechanism cannot be considered better than patents in the aspect of reducing wasteful R&D.
Conclusion
Based on the analysis of the prize mechanism, discussed in the previous section, the author would like to state that this alternative mechanism to promote innovation has various pitfalls and cannot be considered as a full-proof plan to induce innovation. The problem with this model arises when the power which has been granted to the government authorities to determine and prioritize the line of inventions is exercised erroneously. Along with this, if the government authorities are unable to design a proper implementation mechanism for this model then the entire model crumbles down and then the brunt of the government’s failure has to be borne by the taxpayers of the nation. Therefore, the usage of this mechanism should be restricted to the invention of essential products. It will be the responsibility of the government to make sure that such a model is implemented only in a specific sector where putting the money of the nation’s taxpayers at stake would be worth the risk. The parameter for gauging these inventions would require the government to understand the degree to which these inventions would contribute to the well-being of the society as a whole. Therefore, the author would conclude by stating that none of the mechanisms for promoting innovation are flawless, but a unification of these models has the capacity of turning the vulnerability of the individual models into collective strength.
