Vanderbilt Law Review

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When someone speaks of "the law and economics of intellectual property rights" (IPRs), an image along the lines of the following diagram is apt to come to mind: Wilson Sonsini Goodrich & Rosati Professor of Intellectual Property Law, U.C. Berkeley (Boalt Hall) School of Law. For helpful comments, the author wishes to thank members of the Vanderbilt Law School Conference, "Taking Stock: The Law and Economics of Intellectual Property Rights," April, 2000. The usual disclaimer applies.

This is the basic illustration of monopoly price and output, familiar from introductory microeconomic texts. It is often used to explain the effects of IPRs, with the twist that, in this case, monopoly is good because it elicits desired investment in new intellectual creations.

Critics of law and economics dispute the proper characterization of this diagram and all that it represents. Some say it is highly simplistic, even misleading; others deem it an abomination, as wrong for its normative assumptions and implications as for its positive misrepresentations of economic reality. Critics might be surprised to learn how many within the economics trade agree with them. Within economics, and even law and economics, many scholars have been working assiduously to unpack the assumptions, and to elaborate the conditions, behind diagrams such as this one. The past thirty to forty years has produced an eclectic and open-ended strain of economics that parallels, and in some ways rivals, neoclassical economics. The New Institutional Economics ("NIE") appears with increasing frequency in the law and economics literature. This brief Paper explains why it also has a central place in research on IPRs. To convey a sense of the applicability of the NIE to IPRs, I begin with a critique of the basic microeconomic diagram we started with.