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mmm...perfect competition

/. alerted me of a great article (archived) on Reasononline that talks about a paper written by a pair of economists and published by the Federal Reserve Bank of Minneapolis. I would love to get my hands on this original paper. It pretty much puts into words the idea I've had in my head that just throwing copyrights and patents out the door would lead to unprecedented amounts of innovation. Especially in industries like software where it is is so blatantly obvious how everything is supposed to build upon and improve what came before (1.0, 2.0, 3.1, 95, 98, XP, you get the idea). Imagine if the improving process was no longer limited to that one company holding a monopoly over their ideas, but anyone could do it. But how does this help in more tangible markes like pharmaceuticals. How can you expect to make the cost of your R&D back if the minute you let your product out the door others can copy it and start selling it themselves. Right now, a drug company may spend 5 million dollars in research to come up with the latest wonder drug. So what do they do next? The patent the formula so no one is allowed to copy it and product their own pills. Imagine it costs them $20 a pill to produce it. Do they sell the pill for $40? Hell no, they need to make back their R&D before someone comes out with a better pill, so they sell it at $200 a pop. Well in order to make back their 5 mil they need to sell 25,000 pills. And since it cost them $500,000 to produce those pills they need to sell some more. So to finally break even they need to sell a little less than 28,000 pills. But who wants to break even? So they need to sell roughly 56,000 pills to double their money. That may be a fine and good for the drug company, but it sucks for society. At $200 a pill only the richest will be able to afford it. Take away the patent. The minute they sell a pill, a generics company can copy it and start producing imitation versions of the drug for $40. The original company that invented the drug is screwed. But they don't have to be. You are first to market. Sell 10 pills at $1,000,000 each. These will be bought up by generic drug companies so they analyze them and start making their imitaition versions. But it will take time for these companies to do so. In the mean time you've already made back your R&D money plus 50% profit. Once all your competitors have bought the pills they will use to make copies, start selling it in the stores for $60 with your brand name. More people will be able to afford it so you have better initial market share. Once the generic versions are hitting the market you will already have a large customer base. Sure some of them may switch to the generic, but some will stay. And society benifits as well because $40 a pill is easier on the wallet than $200. It's perfect competition and I like it. I'm sold, when do we start?

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