Knowledge and Intellectual Property Rights: An Economics Perspective

Background

In discussing information and knowledge we identify two types of information that helps to form knowledge. The first is costly information, where individuals must invest time and effort to search for information. The second is asymmetric information, where some individuals may not be in a position to judge the quality or make comparisons between different types of information. The more costly and more asymmetric this information is, the more valuable the knowledge that stems from it is likely to be.

Over the last four decades, the analysis of information and its value has generated vast amounts of economic research. The role information plays in markets, industries and countries has been explored across both developed and developing economies. The pioneers of this research were George Akerlof, Michael Spence and Joseph Stiglitz who began studying this issue in the 1970s. Akerlof (1970) is seen as the single most important study in the literature on the economics of information. He analysed how asymmetric information in markets could cause them to fail, if it increased organisational costs. Up to then it was assumed that markets could be competitive when the market price reflected the marginal valuation of the product. Two implications exist from such asymmetric information. One is called adverse selection, that is, bad quality services drive good quality services out of the market. The second is called moral hazard, where effort, such as quality, cannot be easily detected.

Spence (1971) conducted his research on ‘signalling’, defined as the transmission of information between two participants in a market which can help overcome the problem of adverse selection. Signalling requires market participants to take measures that are both visible and costly in order to convince other participants of the quality of their products or their intentions in market negotiations. Examples of such signals are costly advertising and product guarantees as signals of quality, price wars as signals of market power and strength, and delaying tactics in wage offers as a signal of bargaining power.