The visible hand in economics

A Nobel defence of free software

Posted on: October 22, 2007

You all probably know by now that Eric Maskin was among the recipients of this year’s ‘Nobel prize’ in economics for his work on mechanism design. Browsing a few of his papers I came across one that reminded me of Will’s post on free software. Contrary to the obvious intuition, Bessen and Maskin propose that the software industry is an example of just the type of industry which could benefit from the removal of IP protections.

Software exhibits two characteristics that make this possible: sequential innovation and complementarities in technology. Since new software often builds on old software it is socially efficient to allow others to build on current platforms rather than have to reinvent the wheel. Of course, it means that rents that could be extracted through licencing are foregone. However, because software is complementary it is also in firms’ best interests to allow their ideas to be freely used. The complementarity means that others’ innovations increase the value of your future innovations. Thus, if you can speed the development of others’ software through letting them use your ideas then you can massively increase the expected value of your future developments. The conclusion they reach is that removal of patent protections would leave only the most innovative firms in the market and increase both their profitability and total surplus.

The paper discusses patents, not copyright, so it doesn’t directly pertain to open source software: Bessen and Maskin are talking about protection of ideas, not protection of actual written code. They don’t discuss allowing people to directly build on an existing code base but rather allowing ideas to be copied by others using their own code. Thus their proposal still provides significant barriers to entry in the form of an initial investment, but does not bar entry through the creation of monopolies over concepts. I wonder whether the removal of copyright protections would further enhance the incentive to innovate in the industry? Presumably the removal of barriers to entry would reduce profits and increase consumer surplus, but would it reduce or further enhance technological progress?

1 Response to "A Nobel defence of free software"

[…] not so evil after all… We’ve previously blogged about the potential for patent protections to restrict innovation when inventions are sequential. […]

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