Is there peer reviewed evidence that open source production processes increase efficiency and/or consumer surplus? It seems that the first theorem of welfare economics requires complete markets which requires that all actors have perfect information. Yet, producers zealously seek to keep their own production processes secret rather than public.

  • For example, Soda Co. has an unpatented secret recipe at time $t_0$ that sells in the market. Are there economists who argue that if Soda Co. must patent and publicly reveal the secret recipe at time $t_x$, efficiency and/or consumer surplus would increase in comparison to current economy?

If not, are there good economic reasons why economic regulation does not require all suppliers to publicly reveal secret recipes, i.e., all information about the production process that would allow other producers to compete in production of the identical product (whether that be Soda Co.'s management techniques, scheduling practices, shipping arrangements, leasing terms, model number of vats, speed of conveyor belts, actual secret recipe for a beverage, etc.)? That is to say, are there good economic reasons that secrets anywhere in the entire production process are not simply barriers to entry?

Maybe Drink Co. can produce and sell Soda Co.'s recipe for 0.01 less than Soda Co. after they clone Soda Co.'s land, labor, capital, entrepreneurship, and recipe due to one tweak? Maybe consumers will only pay 0.10 less after they possess perfect information on how Soda Co. produces the beverage?

  • $\begingroup$ Producers are not in the business to cater to consumer surplus. And it seems you think that "economic regulation" is like a magic wand -"write the spell (sorry, the regulation), and it is done". The tension between the individual and the collective (and the compromises that must be reached) are the main reason human societies are interesting subjects to study. $\endgroup$ Sep 29 '15 at 23:01

There is a large economic literature on intellectual property rights. However, the issue seems far from settled on what even the optimal duration for patents are. Note that open source is even a step further than a 0 day patent duration. A strong case for your view would probably be found in Boldrin/Levine: http://levine.sscnet.ucla.edu/general/intellectual/againstnew.htm

Here are several further starting points in the literature:

Scotchmer, Suzanne. "Standing on the shoulders of giants: cumulative research and the patent law." The Journal of Economic Perspectives (1991): 29-41.

Besen, Stanley M., and Leo J. Raskind. "An introduction to the law and economics of intellectual property." The Journal of Economic Perspectives (1991): 3-27.

Posner, Richard A. "Intellectual property: The law and economics approach." Journal of Economic Perspectives (2005): 57-73.

  • $\begingroup$ Fantastic answer! In case I was not clear, however, I edited question above to stress that question is not about eliminating patents but requiring patents for everything in the entire production process. Within intellectual property rights literature, have you seen this argument that Soda Co. must publicly reveal blueprint of entire production process (or at least more of it) for potential competitors and consumers to hold perfect (optimal) information? $\endgroup$
    – jtd
    Sep 30 '15 at 12:18
  • $\begingroup$ Sorry, have not seen such an argument. Probably Boldrin/Levine would be closest to this idea. It is actually a straightforward consequence of their thesis. If companies no longer patent their processes but invest effort into hiding these processes, this generates inefficiencies if the patent system is optimal. $\endgroup$
    – HRSE
    Oct 1 '15 at 2:39
  • $\begingroup$ @jtd Why should the trade-offs be different at different steps in the production process? Each technology used (at any point) in the production process was invented (at some cost) by somebody. The ability to control the technology (either because you have a patent or because you keep it secret) and make profits from it is what gives people an incentive to innovate in the first place. Forcing disclosure would improve efficiency to by introducing competition in that part of the production process, but harm it to the extent that innovation is reduced. Policy must balance these two considerations. $\endgroup$
    – Ubiquitous
    Oct 1 '15 at 17:06

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