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Cambridge University Press 978-1-107-13116-3 — On the Shoulders of Giants Edited by Stephen M. Maurer Frontmatter More Information

On the Shoulders of Giants

This book presents eleven classic papers by the late Professor Suzanne Scotchmer with introductions by leading economists and legal scholars. The book introduces Scotchmer’s life and work; analyzes her pioneering contributions to the economics of patents and innovation incentives with a special focus on the modern theory of cumulative innovation; and describes her pioneering work on law and economics, evolutionary game theory, and general equilibrium/club theory. The book also provides a self- contained introduction for students who want to learn more about the various ﬁelds Professor Scotchmer worked in, with a particular focus on patent incentives and cumulative innovation.

Stephen M. Maurer is Adjunct Professor Emeritus of Public Policy at the University of California at Berkeley. A long-time friend and colleague of the late Professor Scotchmer, he coauthored eight articles and book chap- ters with her from 1999 to 2014. Trained as a lawyer, Maurer specializes in innovation, antitrust, and science policy. He is the editor and coauthor of WMD Terrorism (2007) and the author of Self-Governance in Science (2017).

Econometric Society Monographs

EDITORS: Jeffrey Ely, Northwestern University Donald W. K. Andrews, Yale University The Econometric Society is an international society for the advancement of economic theory in relation to statistics and mathematics. The Econometric Society Monograph series is designed to promote the publication of original research contributions of high quality in mathematical economics and theoretical and applied econometrics.

OTHER TITLES IN THE SERIES: G. S. Maddala, Limited dependent and qualitative variables in econometrics, 9780521241434, 9780521338257 Gerard Debreu, Mathematical economics: Twenty papers of Gerard Debreu, 9780521237369, 9780521335614 Jean-Michel Grandmont, Money and value: A reconsideration of classical and neoclassical monetary economics, 9780521251419, 9780521313643 Franklin M. Fisher, Disequilibrium foundations of equilibrium economics, 9780521378567 Andreu Mas-Colell, The theory of general equilibrium: A differentiable approach, 9780521265140, 9780521388702 Truman F. Bewley, Editor, Advances in econometrics – Fifth World Congress (Volume I), 9780521467261 Truman F. Bewley, Editor, Advances in econometrics – Fifth World Congress (Volume II), 9780521467254 Hervé Moulin, Axioms of cooperative decision making, 9780521360555, 9780521424585 L. G. Godfrey, Misspeciﬁcation tests in econometrics: The Lagrange multiplier principle and other approaches, 9780521424592 Tony Lancaster, The econometric analysis of transition data, 9780521437899 Alvin E. Roth and Marilda A. Oliviera Sotomayor, Editors, Two-sided matching: A study in game-theoretic modeling and analysis, 9780521437882 Wolfgang Hardle, Applied nonparametric regression, 9780521429504 Jean-Jacques Laffont, Editor, Advances in economic theory – Sixth World Congress (Volume I), 9780521484596 Jean-Jacques Laffont, Editor, Advances in economic theory – Sixth World Congress (Volume II), 9780521484602 Halbert White, Estimation, inference and speciﬁcation, 9780521252805, 9780521574464 Christopher Sims, Editor, Advances in econometrics – Sixth World Congress (Volume I), 9780521444590, 9780521566100 Christopher Sims, Editor, Advances in econometrics – Sixth World Congress (Volume II), 9780521444606, 9780521566094 Roger Guesnerie, A contribution to the pure theory of taxation, 9780521629560 David M. Kreps and Kenneth F. Wallis, Editors, Advances in economics and econometrics – Seventh World Congress (Volume I), 9780521589833 David M. Kreps and Kenneth F. Wallis, Editors, Advances in economics and econometrics – Seventh World Congress (Volume II), 9780521589826 David M. Kreps and Kenneth F. Wallis, Editors, Advances in economics and econometrics – Seventh World Congress (Volume III), 9780521580137, 9780521589819 Donald P. Jacobs, Ehud Kalai, and Morton I. Kamien, Editors, Frontiers of research in economic theory: The Nancy L. Schwartz Memorial Lectures, 1983–1997, 9780521632225, 9780521635387 A. Colin Cameron and Pravin K. Trivedi, Regression analysis of count data, 9780521632010, 9780521635677

Steinar Strom, Editor, Econometrics and economic theory in the 20th century: The Ragnar Frisch Centennial Symposium, 9780521633239, 9780521633659 Eric Ghysels, Norman R. Swanson, and Mark Watson, Editors, Essays in econometrics: Collected papers of Clive W. J. Granger (Volume I), 9780521772976, 9780521774963 Eric Ghysels, Norman R. Swanson, and Mark Watson, Editors, Essays in econometrics: Collected papers of Clive W. J. Granger (Volume II), 9780521792073, 9780521796491 Cheng Hsiao, Analysis of panel data, second edition, 9780521818551, 9780521522717 Mathias Dewatripont, Lars Peter Hansen, and Stephen J. Turnovsky, Editors, Advances in economics and econometrics – Eighth World Congress (Volume I), 9780521818728, 9780521524117 Mathias Dewatripont, Lars Peter Hansen, and Stephen J. Turnovsky, Editors, Advances in economics and econometrics – Eighth World Congress (Volume II), 9780521818735, 9780521524124 Mathias Dewatripont, Lars Peter Hansen, and Stephen J. Turnovsky, Editors, Advances in economics and econometrics – Eighth World Congress (Volume III), 9780521818742, 9780521524131 Roger Koenker, Quantile regression, 9780521845731, 9780521608275 Charles Blackorby, Walter Bossert, and David Donaldson, Population issues in social choice theory, welfare economics, and ethics, 9780521825511, 9780521532587 John E. Roemer, Democracy, education, and equality, 9780521846653, 9780521609135 Richard Blundell, Whitney K. Newey, and Thorsten Persson, Advances in economics and econometrics – Ninth World Congress (Volume I), 9780521871525, 9780521692083 Richard Blundell, Whitney K. Newey, and Thorsten Persson, Advances in economics and econometrics – Ninth World Congress (Volume II), 9780521871532, 9780521692090 Richard Blundell, Whitney K. Newey, and Thorsten Persson, Advances in economics and econometrics – Ninth World Congress (Volume III), 9780521871549, 9780521692106 Fernando Vega-Redondo, Complex social networks, 9780521857406, 9780521674096 Itzhak Gilboa, Theory of decision under uncertainty, 9780521517324, 9780521741231 Krislert Samphantharak and Robert M. Townsend, Households as corporate firms: An analysis of household finance using integrated household surveys and corporate financial accounting, 9780521195829, 9780521124164 Rakesh Vohra, Mechanism design: A linear programming approach, 9781107004368, 9780521179461 Daron Acemoglu, Manuel Arellano, and Eddie Dekel, Advances in economics and econometrics – Tenth World Congress (Volume I), 9781107016040, 9781107638105 Daron Acemoglu, Manuel Arellano, and Eddie Dekel, Advances in economics and econometrics – Tenth World Congress (Volume II), 9781107016057, 9781107674165 Daron Acemoglu, Manuel Arellano, and Eddie Dekel, Advances in economics and econometrics – Tenth World Congress (Volume III), 9781107016064, 9781107627314 Andrew Harvey, Dynamic models for volatility and heavy tails: With applications to financial and economic time series, 9781107034723/9781107630024 Cheng Hsiao, An analysis of panel data, second edition, 9781107038691/9781107657632 Jean-François Mertens, Sylvain Sorin, and Shmuel Zamir, Repeated games, 9781107030206/ 9781107662636 Christopher P. Chambers and Federico Echenique, Revealed preference theory, 9781107087804

On the Shoulders of Giants Colleagues Remember Suzanne Scotchmer’s Contributions to Economics

EDITED BY Stephen M. Maurer University of California at Berkeley

One Liberty Plaza, 20th Floor, New York, NY 10006, USA

Cambridge University Press is part of the University of Cambridge. It furthers the University’s mission by disseminating knowledge in the pursuit of education, learning, and research at the highest international levels of excellence.

www.cambridge.org Information on this title: www.cambridge.org/9781107131163 10.1017/9781316443057 © Stephen M. Maurer 2017 This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 2017 Printed in the United States of America by Sheridan Books Inc. A catalog record for this publication is available from the British Library. Library of Congress Cataloging in Publication Data Names: Scotchmer, Suzanne, honoree. | Maurer, Stephen M., editor. Title: On the shoulders of giants : colleagues remember Suzanne Scotchmer’s contributions to economics / edited by Stephen M. Maurer. Description: New York : Cambridge University Press, 2017. | Series: Econometric society monographs ; 57 Identifiers: LCCN 2017014553 | ISBN 9781107131163 (Hardback) | ISBN 9781107578968 (Paperback) Subjects: LCSH: Scotchmer, Suzanne. | Economists–United States. | Law–Economic aspects– United States. | BISAC: BUSINESS & ECONOMICS / Econometrics. Classification: LCC HB119.S36 O6 2017 | DDC 330.092–dc23 LC record available at https://lccn.loc.gov/2017014553 ISBN 978-1-107-13116-3 Hardback ISBN 978-1-107-57896-8 Paperback Deborah F. Minehart’s contribution to this volume does not purport to reflect the views of the US Department of Justice. Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in this publication and does not guarantee that any content on such websites is, or will remain, accurate or appropriate.

For Suzanne

Contents

List of Contributors page xii Preface – S. M. Maurer xv Acknowledgments xvii

1 Introduction – S. M. Maurer 1

PART I. Threads in the Tapestry 7 2 Alaska – S. M. Maurer 8 3 Focus – S. M. Maurer 17 4 Co-Evolving with Suzanne – E. Dekel 20 5 Friend and Colleague – N. Gandal 22 6 Gender – C. A. Jones 23 7 The Centrality of Theory – P. Seabright 25 8 Choosing a Model – S. M. Maurer 27 9 Getting to “Giants”–J. Farrell 31 10 Suzanne in Asia – R. Aoki 33 11 Thinker, Thesis Advisor, Colleague – B. Wright 37 12 Every Criticism Is an Opportunity – J. Zhou 40 13 Top 10 Work Mantras – S. M. Maurer 44

PART II. Innovation Theory (I): Cumulative Innovation 45 14 The Giant’s Shoulders – J. Gans 46 15 Reimagining Innovation Theory – N. Erkal, S. M. Maurer, and D. Minehart 50 16 Intellectual Property: When Is It the Best Incentive System? (2002) 55 Introduction – N. Gallini 55 Article 59 Afterword: Extending the Paradigm – N. Gandal and P. Regibeau 82 17 Standing on the Shoulders of Giants: Cumulative Research and the Patent Law (1991) and On the Division of Proﬁt in Sequential Innovation (1995) 85 Introduction – M. L. Katz and C. Shapiro 85 Article: Standing on the Shoulders of Giants 89

x Table of Contents

Article: On the Division of Proﬁt in Sequential Innovation 102 18 Patent Breadth, Patent Life, and the Pace of Technological Progress (1998) 121 Introduction – N. Gallini 121 Article 130 Top 10 Insights About Intellectual Property – S. M. Maurer 155

PART III. Innovation Theory (II): Law and Economics 157 19 The Long Journey: From Models to Legal Doctrine – S. M. Maurer 158 20 Damages and Injunctions in Protecting Intellectual Property (1999) 164 Introduction – S. M. Maurer 164 Article 167 21 The Law and Economics of Reverse Engineering (2002) 196 Introduction – P. Samuelson 196 Article 201 22 Proﬁt Neutrality in Licensing: The Boundary Between Antitrust Law and Patent Law (2006) 230 Introduction – S. M. Maurer 230 Article 234

PART IV. Club Theory 263 23 Partnerships (1988) and Clubs and the Market (1999) 264 Introduction – R. M. Anderson and C. Shannon 264 Article: Partnerships 269 Article: Clubs and the Market 285

PART V. Evolutionary Game Theory 307 24 On the Evolution of Attitudes Towards Risk in Winner-Take-All Games (1999) 308 Introduction – A. J. Robson 308 Article 312 Afterword: From Risk Preferences to Afﬁrmative Action – C. A. Jones 331

PART VI. Public Policy 335 25 Audit Classes and Tax Enforcement Policy (1987) 336 Introduction – S. M. Maurer 336 Article 341

Table of Contents xi

PART VII. Living Legacy 349 26 Suzanne Scotchmer: A Bibliographic Study – B. H. Hall 350 27 Standing on the Shoulders of Scotchmer: The Empirical Economics of Cumulative Innovation – J. L. Furman, F. E. Murray, S. Stern, and H. Williams 358

PART VIII. Epilog 365 28 What Suzanne Would Expect of Us – P. Samuelson 366

Bibliography 368 Index 381

Contributors

Reiko Aoki, Japan Fair Trade Commission, Tokyo, Japan. Robert M. Anderson, Department of Economics, University of California at Berkeley, USA. Eddie Dekel, Department of Economics, Northwestern University, USA, and Berglas School of Economics, Tel Aviv University, Israel. Nisvan Erkal, Department of Economics, University of Melbourne, Australia. Joseph Farrell, Department of Economics, University of California at Berkeley, USA. Jeffrey L. Furman, Questrom School of Business, Boston University, USA. Nancy Gallini, Vancouver School of Economics, University of British Columbia, Canada. Neil Gandal, Berglas School of Economics, Tel Aviv University, Israel. Joshua Gans, Rotman School of Management, University of Toronto, Canada. Bronwyn H. Hall, Department of Economics, University of California at Berkeley, USA. Carol Adaire Jones, Environmental Law Institute, Washington DC, USA. Michael L. Katz, Haas School of Business, University of California at Berkeley, USA. Stephen M. Maurer, Goldman School of Public Policy, University of California at Berkeley, USA. Deborah Minehart, Economics Analysis Group, US Department of Just- ice, Washington DC, USA. Fiona E. Murray, Sloan School of Management, Massachusetts Institute of Technology, USA. Arthur J. Robson, Department of Economics, Simon Fraser University, British Columbia, Canada. Pierre Regibeau, Charles River Associates and Imperial College, London, UK. Pamela Samuelson, Berkeley Law School, University of California at Berkeley, USA. Paul Seabright, Toulouse School of Economics and Institute for Advanced Study in Toulouse, Toulouse, France. Chris Shannon, Department of Economics, University of California at Berkeley, USA.

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List of Contributors xiii

Carl Shapiro, Haas School of Business, University of California at Berkeley, USA. Scott Stern, Sloan School of Management, Massachusetts Institute of Technology, USA. Heidi Williams, Department of Economics, Massachusetts Institute of Technology, USA. Brian Wright, Department of Agricultural Economics, University of Cali- fornia at Berkeley, USA. Junjie Zhou, National University of Singapore, Singapore.

Preface

Prof. Scotchmer always said that the only thing an academic really has is time. But for her there wasn’t enough. She died at Berkeley after a brief illness on January 30, 2014. She was sixty-four. It happened in the middle of the afternoon. The next morning I visited her home departments in Economics, Law, and Public Policy to tell them what had happened. From there the news spread across the planet like ripples on a pond. In our Digital Age the echoes came back at the speed of light – the first email responses from Berkeley within an hour, then Boston in the afternoon, Japan that evening, and France overnight. By week’s end the messages had mounted into the hundreds. At first the messages expressed grief and condolences. But that was transient and soon other sentiments appeared. The first was sorrow for the community, which was bound to be poorer and less fun without her. The second took the form of academic obituaries, in which even experts struggled to put her many contributions in perspective. The third was the bittersweet realization that so much of her research agenda remained to be done, an open invitation for bright scholars to finish what she had started. Three months later, Berkeley Law School tried to satisfy these instincts with a conference to remember and celebrate Prof. Scotchmer’s work.1 Her colleagues came from California and Boston, Israel and Japan. And then something happened that was strange and disconcerting and yet also familiar. Suzanne’s friends and colleagues gathered at the reception. We discussed what the speakers had said. We talked about her research style. We admired her contributions. And then we caught ourselves – a little guiltily – smiling. But that awkwardness soon passed. Because in the end we realized we were only doing what she had always wanted. Being glad in each other’s company. Enjoying clever ideas. Pushing the work forward. None of us had ever been able to refuse Prof. Scotchmer in life. How could we refuse her in death? Seven months later the Toulouse School of Economics held its own memorial lecture, followed by two more in 2016 and 2017. As I write, a fourth is planned with no end in view. Because, as one TSE faculty

1 “Innovation and Intellectual Property: A Tribute to Suzanne Scotchmer’s Work,” Berkeley, California (May 1, 2014).

xvi Preface

member hesitantly told me, they feel that she belonged to them too. Well yes. Who could doubt it? The Berkeley and Toulouse gatherings felt very right – a way for the community to pay its respects and say goodbye. But they also let world- class experts look back, assess the health of their disciplines, and argue about the best way forward. The talks were so good, in fact, that nobody wanted to stop. The idea for this book followed immediately. The usual ambivalence applies. None of us thinks that this book is a fair trade for Suzanne. But we also think that she would understand. Suzanne loved scholarship and, especially, the craft of writing. This is what we have to give. I said that Prof. Scotchmer did not have enough time, but time runs out for everyone. What matters is that she packed the time she did have with life and laughter and work. And besides, she would have been impatient to see us grieving. Better to go on learning, and loving, and celebrating our subject.

Stephen M. Maurer Berkeley, California – July 2017

Acknowledgments

We thank the publishers listed below for graciously allowing us to reprint the following: N. Gallini and S. Scotchmer, “Intellectual Property: When Is It the Best Incentive System?” originally appeared in Adam Jaffe, Joshua Lerner, and Scott Stern (eds.), Innovation Policy and the Economy at pp. 51–77 (MIT Press: 2002). S. Scotchmer, “Standing on the Shoulders of Giants: Cumulative Research and the Patent Law,” Journal of Economic Perspectives 5(1): 29–41 (American Economic Association: Winter 1991). J. Green and S. Scotchmer, “On the Division of Proﬁt in Sequential Innovation,” RAND Journal of Economics 26(1): 20–33 (John Wiley & Sons: Spring 1995). T. O’Donoghue, S. Scotchmer, and J. Thisse, “Patent Breadth, Patent Life, and the Pace of Technological Progress,” Journal of Economics & Management Strategy 7: 1–32 (John Wiley & Sons: 1998). S. Maurer and S. Scotchmer, “Proﬁt Neutrality in Licensing,” American Law and Economics Review 8(3): 476–522 (Oxford University Press: 2006). P. Samuelson and S. Scotchmer, “The Law and Economics of Reverse Engineering,” Yale Law Journal 111: 1575–1663 (Yale Law Journal: 2002). M. Schankerman and S. Scotchmer, “Damages and Injunctions in Pro- tecting Intellectual Property,” RAND Journal of Economics 32(1): 199–220 (John Wiley & Sons: Spring 2001). J. Farrell and S. Scotchmer, “Partnerships,” Quarterly Journal of Econom- ics 103(2): 279–297 (Oxford University Press: 1988). B. Ellickson, B. Grodal, S. Scotchmer, and W. R. Zame, “Clubs and the Market,” Econometrica 67(5): 1185–1218 (The Econometric Society: 1999). E. Dekel and S. Scotchmer, “On the Evolution of Attitudes towards Risk in Winner-Take-All Games,” Journal of Economic Theory 87(1): 125–143 (Elsevier: 1999). S. Scotchmer, “Audit Classes and Tax Enforcement Policy,” American Economic Review: Papers and Proceedings 77(2): 229–233 (American Economic Association: 1987). Edna St. Vincent Millay, excerpt from “Dirge Without Music,” from Collected Poems. Copyright 1928, © 1955 by Edna St. Vincent Millay and Norma Millay Ellis. Reprinted with the permission of The Permis- sions Company, Inc., on behalf of Holly Peppe, Literary Executor, The Edna St. Vincent Millay Society. www.millay.org.

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