Journal of Economic Perspectives���Volume 5, Number 1���Winter 1991���Pages 29-41 Standing on the Shoulders of Giants: Cumulative Research and the Patent Law Suzanne Scotchmer SshouldersNewton ir Isaac himself acknowledged, "If I have seen far, it is by standing on the shoulders of giants." Most innovators stand on the of giants, and never more so than in the current evolution of high technologies, where almost all technical progress builds on a foundation provided by earlier innovators. For example, most molecular biologists use the basic technique for inserting genes into bacteria that was pioneered by Herbert Boyer and Stanley Cohen in the early 1970s, and many use a technique for causing bacteria to express human proteins that was pioneered at Genentech. In pharmaceuticals, many drugs like insulin, antibiotics, and anti-clotting drugs have been progressively improved as later innovators bettered previous tech- nologies. Computer text editors are similar to one another, as are computer spreadsheets, in large part because innovators have inspired each other. An early example of cumulative research was Eli Whitney's cotton gin, which was quickly modified and improved by other innovators who seriously curtailed bis profit.' Eli Whitney was very generous in disclosing details of his gin to other innovators, even beyond what was required by patent law. Other innovators patented improvements, but after much litigation the new patents were held to infringe Whitney's underlying patent. Whitney and his partner did not recover sufficient damage awards to compensate them for their litigation and the time that it took to enforce the patent. For an extensive discussion, see Jeanette Mirsky and Allan Nevins, The World of Eli Whitney (Macmillan Co, 1952). Klemperer (1990) also discusses the cotton gin. ��� Suzanne Scotchmer is Professor of Public Policy, University of California, Berkeley, California.

30 Journal of Economic Perspectives Most economics literature on patenting and patent races has looked at innovations in isolation, without focusing on the externalities or spillovers that early innovators confer on later innovators. But the cumulative nature of research poses problems for the optimal design of patent law that are not addressed by that perspective. The challenge is to reward early innovators fully for the technological foundation they provide to later innovators, but to reward later innovators adequately for their improvements and new products as well. This paper investigates the use of patent protection and cooperative agree- ments among firms to protect incentives for cumulative research. The Available Tools The breadth of patent protection is a key consideration in the incentives to innovate. Patent applicants protect themselves against competition from deriva- tive products by claiming broad protection. Patent law would provide no protection at all if it did not protect against trivial changes, like color or size. The allowable breadth of claims is determined by patent examiners and the judiciary. If broad protection is granted, then a derivative or second generation product will likely infringe the prior patent, so a license on the original patent is required to market it. If patent protection is narrow, then many derivative products and applications can be patented and marketed without infringement.^ We might be tempted to conclude that broad protection encourages firms to find fundamental technologies but discourages them from seeking out second- generation applications and derivative products. However, these two conclu- sions may be inconsistent, since proper incentives to find fundamental technologies may require that the first patent holder earn profit from the second generation products that follow. There will be no such profit if no second-generation products follow. Patent protection would be an unnecessary policy tool if the government had the same information about the costs and benefits of individual research projects as firms have. In that case, the government could simply select the research projects that would be socially efficient and commission research from the lowest cost firms. However, the government will generally have less infor- mation than firms,^ and I will therefore assume that the length and breadth of patent protection and other aspects of the government's policy toward R&D cannot depend on firms' private information about their expected costs.'' '���^U,S, patent protection is broader than that in most other countries, particularly Japan, partly due to the "doctrine of equivalents," which can broaden protection beyond the claims in the patent according to similarity of function, 'Wright (1983) discusses the private information of firms as the main justification for patent protection, rather than using prizes or contracts as incentive instruments, A policy of reimbursing costs to the successful innovator would not be adequate, since a project that was a "good bet" at the beginning might nevertheless fail.