From Volume 84, Number 4 (May 2011)
The incentive thesis for patents is challenged by the existence of alternative means by which firms can capture returns on innovation. Taking into account patent alternatives yields a robust reformulation of the incentive thesis as mediated by organizational form. Patents enable innovators to make efficient selections of firm scope by transacting with least-cost suppliers of commercialization inputs. These expanded transactional opportunities reduce the minimum size of the market into which any innovator–or the supplier of any other technological or production input–can attempt entry. Disaggregation of the innovation and commercialization process then induces the formation of secondary markets in disembodied technology inputs. These organizational effects over transactional, firm, and market structure generate specialization economies that minimize innovation and commercialization costs. These efficiencies in turn exert incentive effects consistent with the standard thesis and market growth effects that extend beyond it. Conversely, the absence of patents, and the resulting obstacles to bargaining over ideas, can compel innovators to select overintegrated structures that inflate commercialization costs, resulting in distorted innovation investment and product output. These relationships are broadly consistent with organizational patterns in selected historical and contemporary technology markets, as illustrated in particular by disintegration processes in the “fabless” segment of the semiconductor market.