[Ip-health] James Surowiecki: Too many stakeholders can be a deal-breaker.

[Sam Houshower]

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[ Picked text/plain from multipart/alternative ]
http://www.newyorker.com/talk/financial/2008/08/11/080811ta_talk_surowiecki

THE PERMISSION PROBLEM
by James Surowiecki
The New Yorker
AUGUST 11, 2008

In the second decade of the twentieth century, it was almost
impossible to build an airplane in the United States. That was the
result of a chaotic legal battle among the dozens of companies=97
including one owned by Orville Wright=97that held patents on the various
components that made a plane go. No one could manufacture aircraft
without fear of being hauled into court. The First World War got the
industry started again, because Congress realized that something
needed to be done to get planes in the air. It created a =93patent
pool,=94 putting all the aircraft patents under the control of a new
association and letting manufacturers license them for a fee. Had
Congress not stepped in, we might still be flying around in blimps.

The situation that grounded the U.S. aircraft industry is an example
of what the Columbia law professor Michael Heller, in his new book,
=93The Gridlock Economy,=94 calls the =93anticommons.=94 We hear a lot abou=
t
the =93tragedy of the commons=94: if a valuable asset (a grazing field,
say) is held in common, each individual will try to exploit as much of
it as possible. Villagers will send all their cows out to graze at the
same time, and soon the field will be useless. When there=92s no
ownership, the pursuit of individual self-interest can make everyone
worse off. But Heller shows that having too much ownership creates its
own problems. If too many people own individual parts of a valuable
asset, it=92s easy to end up with gridlock, since any one person can
simply veto the use of the asset.

The commons leads to overuse and destruction; the anticommons leads to
underuse and waste. In the cultural sphere, ever tighter restrictions
on copyright and fair use limit artists=92 abilities to sample and build
on older works of art. In biotechnology, the explosion of patenting
over the past twenty-five years=97particularly efforts to patent things
like gene fragments=97may be retarding drug development, by making it
hard to create a new drug without licensing myriad previous patents.
Even divided land ownership can have unforeseen consequences. Wind
power, for instance, could reliably supply up to twenty per cent of
America=92s energy needs=97but only if new transmission lines were built,
allowing the efficient movement of power from the places where it=92s
generated to the places where it=92s consumed. Don=92t count on that
happening anytime soon. Most of the land that the grid would pass
through is owned by individuals, and nobody wants power lines running
through his back yard.

The point isn=92t that private property is a bad thing, or that the
state should be able to run roughshod over the rights of individual
owners. Property rights (including patents) are essential to economic
growth, providing incentives to innovate and invest. But property
rights need to be limited to be effective. The more we divide common
resources like science and culture into small, fenced-off lots, Heller
shows, the more difficult we make it for people to do business and to
build something new. Innovation, investment, and growth end up being
stifled.

Opportunities forgone aren=92t always easy to see. The effects of
overuse are generally unmistakable=97you can=92t miss the empty nets of
fishing boats working overfished oceans, or the scrub that covers an
overgrazed field. But the effects of underuse created by too much
ownership are often invisible. They=92re mainly things that don=92t
happen: inventions that don=92t get made, useful drugs that never get to
market.

In theory, one should be able to break a gridlock by striking a deal
that would leave all sides better off. Sometimes that happens. Just
the other week, for instance, Nokia and Qualcomm settled a three-year-
long patent battle, which could accelerate the spread of third-
generation cell-phone technology here and in Europe. In a less
contentious fashion, products like the DVD player quickly became
mainstream and affordable because many companies worked together to
form patent pools. Even the fact that there=92s music on the radio is
the result of songwriters=92 collectively allowing two main groups,
ASCAP and BMI, to handle the licensing of their songs to radio stations.

One reason deals founder is that there are simply too many interested
parties. If, in order to create a new drug, you have to strike
bargains with thirty or forty other companies, it=92s easy to decide
that the price is too high. But often things go awry because owners
won=92t make a deal at a reasonable price, as with America=92s nascent
aircraft industry. Or take a problem that bedevils the oil-and-gas
industry. When different companies own adjacent patches of an oil
field, each will be tempted not only to drill its own patch but also
to try to suck out the resources of its neighbor=92s patch. For
geological reasons, overdrilling actually reduces the total amount of
oil you can get out of the field=97all sides end up worse off. An
obvious solution is to have one company do the drilling and share the
revenues with the other players. But, as the economics professor Gary
Libecap has shown in a historical analysis, such agreements are often
reached only belatedly, if ever.

Recent experimental work by the psychologist Sven Vanneste and the
legal scholar Ben Depoorter helps explain why. When something you own
is necessary to the success of a venture, even if its contribution is
small, you=92ll tend to ask for an amount close to the full value of the
venture. And since everyone in your position also thinks he deserves a
huge sum, the venture quickly becomes unviable. So the next time we
start handing out new ownership rights=97whether via patents or
copyright or privatization schemes=97we=92d better try to weigh all the
good things that won=92t happen as a result. Otherwise, we won=92t know
what we=92ve been missing.