Intellectual Property Protection in the U.S. Software Industry1

Stuart J. H. Graham and David C. Mowery

Haas School of Business

University of California, Berkeley


The software industry is a knowledge-intensive industry whose output is information, the coded instructions that guide the operations of a computer or a network of computers. Both the inputs and much of the output of this industry consist of intangibles, the prices of which contain considerable Schumpeterian rents. The rewards to innovators in the software industry of the 1980s and 1990s were extraordinary, as illustrated by the meteoric rise of William Gates III to control of the largest personal fortune in the world. The modern computer software industry thus is an extreme example of an industry in which the returns to innovators’ investments, and in many cases market structure, are influenced by the ownership of intellectual property. As such, it is hardly surprising that the legal framework establishing and regulating ownership of such property has attracted considerable attention and debate.

The “modern” computer software industry of the twenty-first century differs from the software industry of the 1950s or 1960s, most notably in the growth of mass markets for so-called packaged software. These differences are reflected in the central importance of formal protection of intellectual property. The increased importance of formal intellectual property rights protection, as well as the changing economic and legal importance of different instruments for such protection, create significant challenges for U.S. intellectual property rights policy.


We are grateful to participants in the STEP Board conference on “The Operation of the Patent System,” participants in the U.C. Berkeley Innovation Seminar, and to Professors Rosemarie Ziedonis, Wesley Cohen, and Brian Silverman for comments on the paper. We also appreciate assistance with our analysis of patenting data from Arvids Ziedonis. This chapter draws on research supported by the Andrew Mellon Foundation and the National Research Council.

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