Controlling Prices to Increase Social Welfare

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How Anti-Trust Policy Affects Patent Value

Gilbert and Shapiro argue that the value of a patent depends not only on the explicit patent structure, but also on anti-trust policy and other business regulations affecting how the patented good can be marketed. One effect of all these policies is to regulate the maximal price that the monopolist can charge, or the maximal profit per unit that she can enjoy. Gilbert and Shapiro contend that the maximum flow of profit to the inventor is the most relevant measure of the width of a patent.

Patents are therefore imagined to be rectangular in shape, with profit flow designating the width and L the height. Gilbert and Shapiro argue that under the assumptions described on the previous slide, social welfare is maximized when patents are as long as possible. This is accomplished by awarding an arbitrarily long patent and then regulating the price that a firm can charge for its innovation through legal policy so as to grant the firm the award V.

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