So I'm in the process of hammering out the spec for my first agent-based economic model, and have been gettin' down with another Econ 101 textbook - a much less patronising one than Mankiw's, though I'm amused by just how much Mankiw seems to have lifted directly from this older undergrad workhorse.

Anyway, the authors - William Baumol and Alan Blinder - end a chapter on demand and elasticity with an example: the 1989 court case between Polaroid and Kodak where Polaroid sued Kodak for patent infringement. Kodak had put out their own instant pic camera. Baumol himself was a witness in the case, testifying on behalf of Kodak. Polaroid were after something like $9 billion in lost sales. Kodak conceded the point, but thought the amount should be closer to $450 million. How were these figures arrived at?

Demand is one of the more intuitively straightforward of economic concepts, as is elasticity of demand. Smokers' demand for cigarettes is relativity inelastic: put the price up, their addiction will keep them smoking, though it may reduce the amount a tad. (Though here's an interesting article that highlights how difficult it is to isolate the economic effect of price on demand...)

The fascinating / bizarre thing about the case is that the courts deem it possible to calculate lost revenue. I find this hilarious. The court presumed that the two brands were substitute goods: people buying more of one would equal less bought of the other. But there are complications: Polaroid's patent - like any patent - is basically a government license to monopolise the market for a set period. Kodak's entry into the market would have pushed the price down - as competition is supposed to do. So - and this seems sooo weird - Polaroid were suing to recoup moneys lost through monopoly.

Two more calculations to make: how elastic was the demand for Polaroids? Polaroid obviously wanted to argue that it tended towards inelastic: everyone was going crazy for them, and price would not have mattered too much come Christmas time. If price was elastic, they would have put their prices up - only to find people not buying em. Revenue would have been less than if they hadn't changed their price. But the poor souls couldn't put the price up because of those nasty Kodak folk. So they sued for the difference.

Lastly, though (and I guess this was Baumol's argument) the price of 35mm photography had been dropping rapidly. Now, is that the same kind of market? Is it another substitute product? For what kind of percentage of the market? The court had to have the calculations for 'cross elasticity of demand' - the ratio of demand for Polaroid cameras to the change in price of 35mm gubbins.

The whole idea is weird, and the fact that US courts - and presumably British courts, though I don't know - have the power to order a company to pay up is equally weird. I wonder how much Baumol got from Kodak for acting as their witness? You can see how much money an economic argument - if accepted by the court - would save the company, though the final payment nearly did them in anyway. If he got 1% of the difference, he'd be a very rich man. I imagine he is.

If you're going to allow a tangled, moneyed technocracy to develop in order to protect aspects of the market, why let it protect these aspects? The obvious answer is that its just rent-seeking: the largest companies all implicitly gain from a state that gives them legal monopoly power. But it seems so intrinsically anti-market. It'd be like suing foxes for eating rabbits.

Searching for more on this case, I came across a good e-book by Boldrin and Levine. This chapter has some great stuff on the growth of copyright - and the legal sector to go with it. In four years between 1997 and 2001, patent applications went up by 50%. There was no attendant increase in innovation, as measured by Total Factor Productivity. ("This measures how much output can be produced from a given combination of inputs. Higher TFP means, for example, more and better cars from the same labor and other factors such as metal and plastic.") It did see a huge increase in the number of Intellectual Property lawyers. Increase in the membership of the intellectual property section of the American Bar Association went from 5,500 to near 22,000 in the same period. The chapter goes on to say:

The Polaroid vs. Kodak settlement is widely credited as an important signal of the value of defensive patenting. It is unclear what is it that society gained from that settlement, as all it did was to restore monopoly in a relatively important consumer market, and bring almost to bankruptcy an otherwise thriving company, Kodak. With the windfall payment it received, Polaroid neither created new innovations nor new employment and value added; it just enriched its lawyers, its executives, and, albeit marginally, its shareholders.

The chapter also discusses the more life-and-death matter of HIV drugs. They note that monopolists will usually practice price discrimination: sell at a price you can get people to pay. (A more mundane version of this was coffee stands in stations selling fair trade coffee at a mark-up - even though the coffee was only a tiny bit of the overall cost, they could get away with it because fair-trade drinkers are willing to pay more for their 'ethical' choice.) However, the drugs companies didn't do this for third world countries for fear that consumers there would sell the drugs back to the West, undercutting their market there. Nice.

Do I think there should be no patent law? Hmm, dunno. In the case of huge companies like GlaxoSmithKline, I would argue that all the other advantages they have in the market should be compensation enough, without the need for a WTO-enforced global monopoly. They can make the drug enormously cheaply, they have an established global distribution chain (which again brings the overall cost to them down) and they can market it like no-one else. The only companies they would need protection from would be ones of equal or near-equal size that also had these advantages.

Whether or not a state-sponsored, time-limited monopoly is necessary for innovation, the vast machinery of law at work reminds me of J.C. Scott, when he compares an African community's method of land management - a "living, negotiated tissue of practices which are continually being adapted to new ecological and social circumstances" - to our current property law. He is at pains not to romanticise this notion of community resource management: the point is that it is totally illegible for a state wanting to extract tax. A state treasury literally cannot read what is going on in that community, though the community itself knows very well. Modern property law is exactly the reverse: "readily decipherable only to those who have sufficient training and a grasp of the state statutes." As he says:

local land tenure practice is perfectly legible to all who live within it from day to day. Its details may often be contested and far from satisfactory to all its practitioners, but it is completely familiar; local residents have no difficulty in grasping its subtleties and using its flexible provisions for their own purposes. State officials, on the other hand, cannot be expected to decipher and then apply a new set of property hieroglyphs for each jurisdiction. Indeed, the very concept of the modern state presupposes a vastly simplified and uniform property regime that is legible and hence manipulable from the centre. [Seeing Like a State p.35]

If we go back to thinking about markets, is there a similarly vast gulf of legibility between the kind of market at work in the courtroom of Polaroid vs Kodak - both legible and lucrative to IP lawyers and witnesses like Baumol - and the dense jungle of exchange in more human-scale markets?