Vol ## THE PROBLEM OF UNIFORMITY COST In fact, the problem of uniformity cost is potentially far more ignificant than the example above suggests. The distribution of rewards from both cultural and technological innovation is highly skew. For example, uncertainty about demand or about feasibility leads recording companies, motion picture studios, pharmaceutical companies, and biotechnology research firms to invest millions of dollars that will never be recouped in innovation. In these industries, profits from chart-busting songs, blockbuster movies, and blockbuster drugs must be sufficient to cover the losses incurred on other investments. Consequently, industries such as these demand robust intellectual property rights to maximize the profitability of successful innovations When these rights apply uniformly, the social costs are magnified 2. Uniformity Cost Typology Uniformity costs can be categorized as Type I or Type II. Type I uniformity costs arise when the creators of the same class of subject matter face different magnitudes or types of appropriability problem. For Although any counterfactual query introduces certain biases and uncertainties, and posing factual to interested part significant percentage of inventions would have been developed and brought to market without the prospect of patent protection; (2)this effect varies significantly by industry and ()that nonetheless 80% of patentable inventions were patented in industries with high patent-dependencies (pharmaceuticals, chemicals, petroleum, machinery, and fabricated metal products) and 60% of inventions were patented in less patent-dependent industries(primary metals, electrical equipment, instruments, office equipment, motor vehicles, rubber, and textiles). See id at 175-76 See, e.g., F.M. Scherer, The Innovation Lottery, in EXPANDING THE BOUNDARIES OF INTELLECTUAL PROPERTY: INNOVATION POLICY FOR THE KNOWLEDGE SOCIETY I Rochelle Cooper Dreyfuss et al., eds. 2001)(collecting data showing skew distributions variety of industries); F.M. Scherer, Dietmar Harrhoff Jorg Kukies, Uncertainty and the Size Distribution of Rewards from Innovation, 10 J OF EVOLUTIONARY ECON. 175 (2000)(showing through empirical study that distributions of rewards for innovation is highly skew) 26 See, e.g., Edwin Mansfield, et al, Social and Private Rates of Return from Industriai Innovations, 91 QUARTERLY. J ECON. 221, 233-34(1977) 27 See, e.g, Arthur S. Devany W. David Walls, Motion Picture Profit, the Stable Paretian Hypothesis, and the Curse of the Superstar, 28 J. ECON. DYNAMICS CONTROL 035, 1042(2004)(estimating from gross profit data over 13-year span that only 22% of movies made were profitable and of those, 35% made 80% of the total profits earned) Henry G Grabowski, Patents and New Product Development in the Pharmaceutical and Biotechnology Industries(working paper 2002)(finding that the search for blockbuster drugs is what drives the r&d process in pharmaceuticals" and that"[t]he median new drug does not cover the R&d costs of the average compound)at http://www.econ.duke.edu/papers/oTher/grabowski/pateNts.pdf(visitedAug.1,2005)Vol. ##] THE PROBLEM OF UNIFORMITY COST 10 In fact, the problem of uniformity cost is potentially far more significant than the example above suggests. The distribution of rewards from both cultural and technological innovation is highly skew.25 For example, uncertainty about demand or about feasibility leads recording companies, motion picture studios, pharmaceutical companies, and biotechnology research firms to invest millions of dollars that will never be recouped in innovation.26 In these industries, profits from chart-busting songs, blockbuster movies, and blockbuster drugs must be sufficient to cover the losses incurred on other investments.27 Consequently, industries such as these demand robust intellectual property rights to maximize the profitability of successful innovations. When these rights apply uniformly, the social costs are magnified. 2. Uniformity Cost Typology Uniformity costs can be categorized as Type I or Type II. Type I uniformity costs arise when the creators of the same class of subject matter face different magnitudes or types of appropriability problem. For Although any counterfactual query introduces certain biases and uncertainties, and posing a counterfactual to interested parties poses others, Mansfield’s data suggest that (1) a significant percentage of inventions would have been developed and brought to market without the prospect of patent protection; (2) this effect varies significantly by industry; and (3) that nonetheless 80% of patentable inventions were patented in industries with high patent-dependencies (pharmaceuticals, chemicals, petroleum, machinery, and fabricated metal products) and 60% of inventions were patented in less patent-dependent industries (primary metals, electrical equipment, instruments, office equipment, motor vehicles, rubber, and textiles). See id. at 175-76. 25 See, e.g., F.M. Scherer, The Innovation Lottery, in EXPANDING THE BOUNDARIES OF INTELLECTUAL PROPERTY: INNOVATION POLICY FOR THE KNOWLEDGE SOCIETY 1 (Rochelle Cooper Dreyfuss et al., eds. 2001) (collecting data showing skew distributions in variety of industries); F.M. Scherer, Dietmar Harrhoff & Jörg Kukies, Uncertainty and the Size Distribution of Rewards from Innovation, 10 J. OF EVOLUTIONARY ECON. 175 (2000) (showing through empirical study that distributions of rewards for innovation is highly skew). 26 See, e.g., Edwin Mansfield, et al, Social and Private Rates of Return from Industrial Innovations, 91 QUARTERLY. J. ECON. 221, 233-34 (1977). 27 See, e.g., Arthur S. DeVany & W. David Walls, Motion Picture Profit, the Stable Paretian Hypothesis, and the Curse of the Superstar, 28 J. ECON. DYNAMICS & CONTROL 1035, 1042 (2004) (estimating from gross profit data over 13-year span that only 22% of movies made were profitable and of those, 35% made 80% of the total profits earned); Henry G. Grabowski, Patents and New Product Development in the Pharmaceutical and Biotechnology Industries (working paper 2002) (finding that “the search for blockbuster drugs is what drives the R&D process in pharmaceuticals” and that “[t]he median new drug does not cover the R&D costs of the average compound”) at http://www.econ.duke.edu/Papers/Other/Grabowski/Patents.pdf (visited Aug. 1, 2005)