We've highlighted numerous studies that have shown how patents tend to hinder overall innovation, but there's no doubt that giving out monopolies may encourage different kinds of activities. Petra Moser's research comparing innovation in countries with patents to those without patents has shown that countries without patents tend to be just as innovative, but that the innovation takes different forms. Thus, patents tend to divert from the natural market of innovation to areas that are more easily "protectable." Whether or not that's actually "good" for progress is an open question. A while back, Stephen Kinsella posted a thought-provoking post from Prashant Singh Pawar
examining how patents distort innovation incentives, based on a longer thesis he wrote up
comparing "horizontal innovation" to "vertical innovation." Pawar's basic premise is that patents encourage "horizontal innovation" -- a totally different way of doing the same thing -- vs. "vertical innovation" -- building on what's been done before:
So, I finally came up with the terms 'Horizontal innovation', and 'Vertical Innovation'. Horizontal Innovation is when a parallel technology is discovered (usually to avoid patent infringement). For example if a company develops a flying car using (say) hydrolic expansion, and they get a patent of it, another company develops (or has to develop) a flying car technology by using Thermo-plazma radiator engine. Both these technologies achieve the same end, they enable a car to fly, so this is horizontal innovation. This is what patent proponents talk about being squashed when they say innovation will be reduced when patents are removed. There will not be Google G1 phone,Blackberry and iPhone if there were no IP rights.
Vertical innovation is when a technology is built top of another technology merely by adding a new element to it. For example if you develop a Car which can travel on water, and I take that car, and add a Sail to it to make it use wind then that's called a vertical innovation. With patents, only the patent holder can think of adding a sail on the boat-car and sell it, without patents, innovations will be done all over the world by every kind of boat and car enthusiast. There will be only one smart phone in this world, but it will be having numerous variants, such as a Google gPhone (synced with google services), a Microsoft mPhone (synced with microsoft services), and so on.
Patents promote horizontal innovation, but restrict vertical innovation. Without patents we will have more vertical innovation but less horizontal innovation.
It's an interesting theory, and it would be great to see some further research done to see if it's supported by the evidence. Of course, it also fits with what we've discussed in the past about the difference between invention (coming up with something new) and innovation (successfully bringing something to market such that people want it). Studies have shown over and over again that true innovation is an ongoing process, of continuing to build on what's come before, making it better and having it better serve the market. That is the sort of thing that we regularly see held back by patents -- it's the type of "vertical innovation" that Pawar is suggesting. Is society better off with a totally different type of flying car? Or are we better served by having lots more resources put towards making the flying car better serve our needs? I'd argue the latter, but would be interested to hear from people who argue the former.