Patent Wars

Posted: August 20, 2012 in Economics, Game Theory

The idea of patents made a lot of sense when technological advance was true innovation where blood sweat and tears were poured into the research and development of a new product but these days we’ve got people trying to enforce stuff like “look and feel” as a patent.  The patent wars that we’re currently witnessing between the mobile device firms seems to be a massive waste of money that will only lead to the mutual destruction of all involved.  You would think that the mobile device firms would have realised by now that so long as they are all making money and innovating to ensure future revenue that there is no long term benefit to the extensive legal actions that is probably costing 100s of million in legal fees and damaging the market for all participants. However what will evidently be a very irrational long term impact is essentially fuelled by the very rational short term strategy that creates an escalating hostile environment.

This is actually a perfect example of the “dollar auction” where it is posed that 2 players may bid in whole cents for a single dollar, the winner gets the dollar for their bid, and the loser gets nothing and still needs to pay their bid. It is logical to maximise profit and bid a single cent for that dollar to make 99 cents profit, the second player seeing an opportunity to make 98 cents bids 2 cents and this goes on until the bid is 99 cents where it is then more preferable to bid a dollar and make nothing than lose 98 cents. This then escalates into increasing irrational bids above the single dollar as it is preferable to lose 1 cents as compared to 99 cents and so on.

This game is actually infinite, except in the real world there is a limitation of resources where the first player to run out of resources to bid will essentially lose. While the other player can bask in the light of their victory it should be noted that while they beat their opponent, it came at a massive cost to themselves as well. The patent wars will most likely play out in a mutually assured destruction of the players involved but on the bright side maybe a patent war will teach the world about the follies of actual war… or maybe it won’t.


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