Licensing in the chemical industry

A patent confers on the patentee the right to exclude others from the use of the knowledge that the patent covers. Patents, however, are not the only feasible way to reach exclusiveness and other economic means might be used as well. Indeed, the alternatives are often thought to be more effective at enabling the inventor to benefit from the innovation than patenting itself (Levin et al., 1987; Cohen et al., 1996). The instrument of exclusion is, however, not a matter of indifference for society. The way in which patents are used (or not used) affects the evolution of the industrial structure and the technology itself. Specifically, unlike such alternatives as lead time, first mover advantage and secrecy, patents can be used to sell technology, typically through license contracts. Simply put, patents can play a key role in facilitating the purchase and sale of technology. This essay moves beyond the traditional approach to patents that has mainly focused on patents as means to exclude others and highlights the role of the market for technology. A market for technology not only helps diffuse existing technology more efficiently, it also enables firms to specialize in the generation of new technology. In turn, such specialization is likely to hasten the pace of technological change itself. However, the development of a market for technology is not an automatic outcome, and depends upon a number of factors that include the strength of patent rights, as well as the nature of the technology and the industry structure itself.