MGT 3050 Midterm #2

Patenting is often key to?

Achieving profits from inventions

Inventions

Nearly always driven by expected profit-seeking motivesOnly time it doesn't apply is when people are already rich

Patent System

Exclusive right granted for product or a process that provides a new way of doing of something, or offers a new technical solution to a problem
Secured to the inventor, for a limited amount of time, the exclusive use of his invention
Inventor has a monopoly for a bit.

Patent Requirements

must be novel, non-obvious, and useful
Invention cannot already patented, described in a printed publication, or in public use, on sale, or otherwise available to the public before effective filing date of the claimed invention
Invention cannot be an idea or suggestion and must have a useful and stated purpose

Utility patents

granted to anyone who invents or discovers any new and useful process, machine, article of manufacture, or composition of matter, or any new and useful improvement thereof
Most patents
how something works

Design patents

granted to anyone who invents a new, original and ornamental design for an article of manufacture
the way something looks

Plant Patents

granted to anyone who invents or discovers and asexually reproduces any distinct and new variety of plant

Why limits to protection?

Need to allow inventors to receive a return, but need to make sure protection does not prevent of discourage future inventions

Trademark

Word, name, symbol, or device that is used to indicate the source of the goods and to distinguish them from the goods of others

Copyright

Protection provided to the authors of "original works of authorship" including literary dramatic, musical, artistic, and certain other intellectual works, both published and unpublished

Patent Act of 1790

Act to promote the progress of useful Arts14-year term of exclusive right to use invention without the possibility of an extension
Patents needed to be important
No patents for foreigners
Created Patent Board: Secretary of State, Secretary of War and Attorney General

Patent Act of 1836

First modern patent office
Created official patent office
Required Information on patents to be made public
Add a possible 7-year extension to 14-year term
Removed the US nationality and residency requirements
First most standardized patent system

Patent Act of 1952

Clarified and simplified existing law for modern world

Leahy-Smith American Invents Act

Switch from a "first to invent" to a "first to file"

Patent Cooperation Treaty of 1970

Created a unified procedure for filing patents in more than one country(over 152 countries have signed treaty)
Still must fill for patent and go through search but greatly cuts down on time and cost of applications
Can still be denied patent by countries

Goodyear

Discovered and patented ability to vulcanize rubberq

Moser (2005)

Most focus on the number of patents responding to profit motivesHowever patents can also affect the types of innovations that occur
Studies inventions prevented at world's fair in Londonand Philadelphia
finds a mix of inventions across countries and industries depending on patent laws
Countries without patent protection focused on scientific instruments, food processing, or dye stuffs (things not easily copied)
Countries with patent protection were much more general in their inventions

Perlman (2016)

Examines the geographic location of patenting activity
Finds that the arrival of transportation improvements to an area greatly increased the amount of patents per person
Patents tend to only increase when transportation improves.

Inventive activity (i.e., the creation of new inventions) is nearly always driven by what:

A profit-seeking motive

In order for an invention to receive a patent today, it must have certain properties. Which of the following is not one of those properties?

Important

Which is the most likely example of a design patent?

A patent on the shape of the new VolksWagen Beetle car design

A copyright is an:

exclusive right granted to an "original work of authorship" including literary, dramatic, musical, artistic, and certain other intellectual works, both published and unpublished

Patenting is important for economic growth, but is subject to a "balancing act". Why is this the case?

The Patent Office needs to encourage initial invention, but make sure protection does not discourage future inventions

What was the main purpose of the Patent Cooperation Treaty of 1970?

Create a unified procedure for filing patents in more than one country

Examining the location of patenting activity, Perlman (2016) argues that the size of a market increases the number of patents because _______.

The arrival of transportation improvements to an area (particularly railroads) greatly increased the number of patents produced

Total Cost (TC)

Total amount of money spent order to produce specified number of goodsContains both fixed and variable costs

Variable Costs

costs that vary with the quantity of output producedinputs for the product itself

Fixed Costs

costs that remain constant as output changesLand, factories, a salaryupfront costs`

Average Total Cost (ATC)

Amount of money spent on average to produce one unit of a goodATC=TC/Q
Scaling up reduces this

Most technology applies to `

Fixed Costs

Total Revenue (TR)

Total amount of money received for selling specified number of goods
TR=Quantity Sold X Price of Good

Total Profit

TR-TC

Cradle

If you have really low output, you don't need expensive tech
Apartment w/a 2ft yard, you don't wanna buy a lawnmower, you would just use scissors.

Economies of Scale

When you scale up you pay less per item

Early Manufacturing in the US

Severely lacking

1790 Census fo Manufacturers

4/5th of clothing was homemadeNo textile spindles drain by water powerManufacturing localHigh transport costs

US produced double the industrial goods of western Europe

1914

What changed for US manufacturing

American innovationTrade Policy

Migration of the Industrial Revolution

U.S. gained advantage from "illegal" migration of smart people
Samuel Slater smuggled tech out of UK for first textile mill
Francis Cabot Lowell traveled UK "studying" weaving technology before creating a waterpower loom and the first large-scale weaving factories

American Ingenuity

We innovated on the technology we stoleWe innovated in a way unique to the US

American Innovation

US inventions and machine choices economized on labor at the expense of capital and raw goods

Why did the US innovate that way

We didn't have as many skilled workers

The "American System"

Emphasized-Simplicity of design -standardization/interchangeable parts- economies of scale-continuous process production (producing all parts of a product at all times)
Minimized need for many skilled workers and increased productivity of unskilled workers

Adoption of Technology

The reapersold 3,400 by 1850sold 70,000 in the 1850s

Evolution of Power Sources

Animal Energy-Extremely limited
•Water power-Efficient but did not produce much power-Drawbacks: Somewhat seasonal and restricted locations
•Steam-More power, not seasonal, and could be placed anywhere-Drawbacks: Had to bring coal and water, needed lots of repairs, and often broke down
•Electricity-More efficient and safe than steam-Drawbacks: Need to invest in electrical system

Hamilton's Report on Manufacturers

Push for more aggressive centralized approach tomanufacturing-Must first argue that manufacturing is not worse thanagriculture and won't hurt farmers•Sees need to be able to compete with foreignproducers who have a head start-Some foreign governments also supporting theirmanufacturers directly (i.e., mercantilism still exists)•Recommendations:-Gov. bounties (i.e., subsidies) needed-Tariffs to raise revenue and protect infant industries

US neutrality

US declared neutrality in Napoleonic WarWar eliminated mercantilist policies of Europe and sidelined two largest exporting countriesRapid growth of foreign trade driven by high number of re-exportsAllowed some manufacturing to develop as typical UK imports were slowed

Jefferson Embargo

Jefferson convinced Congress to cease trade-believed it would hurt Britain more than US
Reaction to seized U.S. ships and soldiers-British required merchants to stop and be searched for French goods/soldiers-France declared they would seize any ship that compiled with British
Embargo followed up by War of 1812 with similar outcomes

Post-war policy

Britain wanted to dump goods on US market
US manufactures demanded higher tariffs of protection-Raises costs that foreign manufacturers have to pay to supply U.S. market and also raised prices in domestic country.

Free trade is generally beneficial except

Infant industriesNational defense

Infant Industry Argument

Just like anything new, it takes time to figure things out
You should protect industries that will be profitable and necessary once they start.
Needs to be an industry that will eventually compete
Should be temporary and targeted

Case on The American System

-How specifically did state and local governments encourage the domestic economy?
-How specifically did the national government encourage the domestic economy?
-What specific factors encouraged the raising of tariffs again after lowering tariffs in 1857?
-Why was there an economic incentive for Europeans and other foreigners to emigrate to America?

The U.S. manufacturing system started very slow. Which of the following was the first major step to establishing U.S. manufacturers that could compete with European ones?`

Migration of smart people who had "studied" European technology

Which of the following was not a key emphasis of the "American System"?

Focus on highly skilled labor

Economies of scale is a strategy to lower _______?

Average total costs

American technology developed much differently from Great Britain because_____?

America had fewer people relative to land than Great Britain and thus wanted to reduce labor requirements

Even after the invention of the reaper, many farmers still used a grain cradle due to their cost differences. Which of the following best describes the relative costs of each tool?

The reaper had a high fixed cost and low variable costs compared to the cradle

Why would you not want to produce with a reaper if you had a small farm?

A farmer would not be able to produce enough to pay down the high fixed costs of buying a reaper

In his Report on Manufactures, Hamilton argued that the government needed to support manufacturing. Which of the following was notone of the main reasons that Hamilton gave?

The U.S. needed a positive trade balance in order for it succeed relative to others

\_____is the economic term that people get more efficient doing something the more they do it over time?

Learning by doing

Who is generally hurt by protective tariffs and who is generally helped?

Exporters and consumers are hurt by tariffs and protected industries are helped

Which of the following events encouraged a large-scale but temporary increase in U.S. factory incorporations?

Jefferson Embargo of 1807-1809 and subsequent War of 1812

Economic Inequality

difference in economic well-being among individuals in a group
does not only affect lower income groups and their relative quality of life
open question of what the "optimal" level of inequality is for economic growth and well-being(somewhere in the middle)

Various Measures of Inequality

Need to define what the base variable is going to be-Income/wages (most common)-Wealth-Health/education-Happiness
Need to define what your measuring-value of largest-comparison of largest to smallest-value of smallest

Concentration Ratios

Percent of income concentrated in largest group

Relative Concentration Ratios

Percent of income concentrated in a high group compared percent of income concentration in a low group(can be manipulated the most)

Gini Coefficient

Measures the inequality among the entire distribution of population(most robust measurement)Totally equality G=0Totally equality G=1

Typical Approaches to Measuring Inequality

Concentration Ratios, Relative Concentration Ratios, Gini Coefficient

Concentration Ratio Benefit:

easy to conceptualize and calculate

Concentration Ratio drawback

Focuses on either top or bottom groups and have to pick group

Relative Concentration Ratio benefit

Gives some information on top and bottom without requiring all information

Relative Concentration Ratio drawback

Have to pick groups

Gini Coefficient Benefit

Looks at entire distribution of population

Gini Coefficient Drawback

Hard to calculate as need to know entire population

Kuznets (1955)

Argues that inequality should be an "inverted-U" shape in the long run-(1) Everyone in a country starts out the same, (2) a few rich entrepreneurs or inventors emerge when opportunities are limited, and (3) everyone moves towards equality as opportunities and education increases

Piketty and Saez

Find the opposite case; a "U-shape"-Inequality crashed during Great Depression and WWII for most wealthy and started to rise back in 1970s
Not high capital incomes (i.e., income from stocks, bonds, commodities and land) driving pattern-Capital income is small proportion of top group and more people invest in market today than historically-No rise in stock dividends either-Same pattern in wage data• Authors argue its a slow return from Great Depression and WWII-Taxation prevented quick rebound

Frydman and Jenter (2010)

Examine the rise of CEO compensation broken down by type of compensation- Wages-Bonuses-Stock options-Long-term incentive plan
Findings:-Compensation has been rising particularly after 1970 and most strongly after 1990
-Most of the rise is the result of increasing stock options and long-time stock incentive plans

Principle-Agent Problem

Managers do not always have the same incentives as the owners-Stockholders want long-run growth and high profit to increase stock prices and dividends-Wages/bonuses based on current performance, so managers have an incentive to sacrifice future profit for current profit

How to solve principle-agent problem?

Non-wage compensation through stock options and long-term incentive plans an attempt to solve this issue-Better aligns the incentives of managers and owners-"Clawbacks" of bonuses (i.e., forcing managers to pay back bonuses if profit falls in the future) are becoming common

How did mass production fundamentally alter industrial firm structure

Need for development of good Management with clear chain of command and documentation
Railroads were first industry to make the switch

How did mass transportation allow for development of distribution systems

Transportation and telegraph allowed coordinationIncreased speed and regularity of input/output flows

Manufacturing belt

85-90% of industry and manufacturing were condensed in the midwest until about the 1970s now referred to as the Rust belt

Why was the manufacturing belt in the midwest

Center of the countryClose to raw goods (particularly iron and coal)Demand for manufacturing goods rising with new urbanizing areas

Why does the manufacturing belt stay in the midwest?

Fixed costs already paidAgglomeration economies-firms are more efficient when operate around other similar firms. Good infrastructure.You can see what your competitors are doing.

How did the nature of competition change?

Before transportation revolution most firms sold in a single location
Declining transportation costs brought many more firms into competition
Development of retail chains and mail order catalogues further increased competition with non-local companies

Perfect competition

many firms compete with each other on the same products-generally prices are low and output is high-hard for firms to early large profit and consumers are much better off-low barriers to entry

Imperfect competition

many firms compete with each other on differentiated products-Prices and output not necessarily high or low-Firms can earn some profit but not huge

Monopoly

A single producer in a market allowing them to set whatever price they want-Prices are high and output is low-Profits are high and consumers are worse off-Limitations on entry

Collusion

A group of producers agree not to compete for others' business-An attempt to act like a monopoly by setting price among themselves-Works so long as producers abide by rules

How to respond to competition

Growth of the scale of production and of railroads posed threat to profits
Many firms colluded to keep prices high-Individuals become synonymous collusion- Different ways to achieve collusion but few ever worked out in the long run

Robber Baron

a person who has become rich through ruthless and unscrupulous business practices

Collusion Structure

Handshake deals are hard to maintain
Trust developed to main collusion by sharing profits-buy stock in each others' firms-some coordination but still little enforcement
Holding companies develop as trusts begin to be challenged by government-A business or firm that fully owns the outstanding voting stock of other companies-Help control the actions of other companies

Jay Gould

First to wield the power of Wall Street to force way into companies
Proved to Vanderbilt and other railroad tycoons that collusion was not possible in the long run
Led to merger waves in 1870s and 1890s

Where did standard oil start?

Cleveland, a single oil refinery
Created by John D Rockefeller and Henry Flagler
Grew eventually to produce, transport, refine and market oil of all kinds

By 1880 Standard Oil

Controlled the refining of nearly 90% of all oil produced in U.S.
and supplied over 60% of Europe's oil consumption into the early 1900s

What series of moves did Standard Oil do?

Bought up all of other Cleveland refiners
Collusion with railroads and other refiners
Economies of scale and horizontal integration
Firming up management through holding company structure
Pipelines and vertical integration

Local Consolidation for Standard oil

Standard Oil buys most Cleveland refiners through stock deals
Helped by South Improvement company-Attempt by railroads to use refiners as "eveners" (shifting quantity of oil helps maintain collusion among railroads-Refiners did not get low rates but got cut of oil shipped
Most refiners sold at low prices in order to participate in deal
South Improvement Company failed but was too late

Successful Collusion

Standard Oil negotiated better deals with rails
Cleveland acquisitions allowed company to bargain with railroads-Not just about pure capacity but also could guarantee shipments-Largely reestablished South Improvement Company
Allowed Standard Oil to form a trust with major refiners in other cities-Kept deal quiet to avoid issues-Companies make it seem like they are still independent

Reducing Costs and Increasing Products

Shut down small refineries and encouraged production at large refineries to achieve economies of scale
Pursue horizontal integration-increasing production of related goods or services-often cheaper to make multiple similar products at the same time (sometimes products are byproducts-Produce kerosene oil, petroleum jelly, and other products

Fortifying Management

Begins to replace trust with holding company-creates individual firms that have own management but are fully owned by a single company and managed by executive committee
Avoids potential for trust members to take own path towards objective
Creates a single unified chain of command with potential punishment for deviations-but still provides flexibility for local conditions