A more efficient system (The Economic Model behind the TRIPS PLUS ULTRA Proposal)

NOTE: This models provides the proper framework for the analysis of the efficiency of the TRIPS PLUS ULTRA Proposal. For an analysis of the the enhanced effectiveness (compliance) that the implementation of proposal might produce, click HERE.

For a plain language explanation of what the model means and its implications for consumers, please click here.

Efficiency.

“The model addresses the issue of global reward towards innovation abstractly, from an aggregate point of view. The “x” axis indicates quantity, in an abstract way. The “y” axis indicates the average prices paid for technology relative to income, i.e., relative to each country’s average purchasing power. In the model I am assuming the possibility of price differentiation is not presented. Prices relative to income paid for technology in a richer country will be on average lower than in a poorer country. The elasticity represented below could be any since no specific values are given in the “x” and “y” axis, and, more importantly, the result is always the same with whichever elasticity the demand curve could have (assuming for the model both countries have the same [populations, with the same wishes and desires]). If two countries have the same number of habitants, and one is richer than the other, all other things equal, the exclusivity in a poorer country will produce more deadweight loss than in the richer country.[1] In the case of a higher average price paid in relation with income, less quantity would be sold. At a price “y’” (for the poorer country), the quantity will be “x’.” For a lower price “y” (for the richer country), the quantity will increase at “x”.

Note: A correction is made in the previous paragraph within the []; the original reads “demand”.

Deadweight loss for the richer country is represented by area f. Deadweight loss for the poorer country is represented by areas d, e, and f (it is always less for the richer country). Consumer’s surplus that remains is represented by area a in the case of the poorer country and areas a, b, and d in the case of the richer country. The conclusion of this model hold water for all cases in which the demand of the richer country is more inelastic than the demand of the poorer country, since the price is lower for the rich country (thus one side of the triangle that represents deadweight loss will always be shorter) and the hypotenuse (the side opposite to the right angle) will also always be shorter for the rich country (inelastic demand curve is steeper).[2] Although it is a simple and static model (it compares two countries at the same moment in time), the model determines a clear and logical tendency.”

EconomicModel

 

Taken from Esteban Donoso, JIPEL, p. 116-118.

[1] “The area under the demand curve is the consumers’ surplus that would exist at a competitive price of 0. Marginal cost is represented by line xo, assuming 0 cost for reproducing all patented inventions, which is obviously not true (there is always a cost, which is typically much lower that the monopolistic price). This assumption in the chart certainly serves the analysis (if not we should establish a proportion–or percentage—of the marginal cost in relation to the per capita income of each country, that will complicate the graphic unnecessarily).”

[2] “From an aggregated point of view (demand for all technologies) the case in which the demand curve of the poorer country is more inelastic will be rare since prices have bigger impact in persons with lower income.”

  • NOTE: The issue of the impact of different levels of income per capita in the global patent scheme is an issue that economic models have failed to properly address (although income per capita is implicit, of course, in many other models that have addressed innovation globally). This model addresses it in such a simple way that the solution for the global system of protections of inventions presents itself evident. This model does not attempt to find the optimal length for patents, just to address the effect that income has in the global patent scheme. This model founds its merits in its simplicity. For a brief comment on the optimal time click here.
  • populations, with the same wishes and desires
  • For background about the model click here.
  • The model compares in a static manner deadweight loss in two countries, one richer than the other, with the same demand and elasticity.
  • For some limitations to the model, click here.
  • For the implications and characteristics of the model, click here.