The impact of software patents on the structure of the software market - a simulation model

The issue of software patents is widely discussed in Europe today. The standard economic rationale for patents is to protect potential innovators from imitation, which ultimately provides the incentive to incur the costs of innovation. This incentive topic is strongly discussed in network effect markets such as the software market. We identified five characteristics of software which are crucial for the question of patenting and its consequences: Sequentiality, complementarity, the utilization and availability of open code and the necessity to ensure interoperability as well as the digital character of the goods. Based on seven assumptions affiliated from the literature, we developed a bipartite central probability model comparing a deregulated market without patents to a market using the patent system. The main objectives were to evaluate the frequency of innovations in the software market and on the other hand to investigate monopolistic tendencies. We simulated our model under two different parameter constellations (optimistic and pessimistic environment from a patent owner’s view). Selected snapshots of exemplary simulations showed that strong patent protection circumvented technical progress from a macroeconomic perspective. Moreover, in the long run only one actor (monopolist) dominated the market. Reducing the protection strength (pessimistic environment) resulted in partially contrary effects. N. Hoppen, D. Beimborn, W. König The Impact of Software Patents