Patents are legal documents that give inventors the exclusive right to a product design or idea. With a patent, companies can protect product designs they've worked on, using the legal system. While many companies take out patents on their work -- often years before they actually release products -- the patent system has its downside as well. This is especially true for companies that are first entering a market, or don't have significant assets to invest in protecting their patents.
When it has a patent, a business has a legal right to stop any competitors from copying its patented idea or product. This means that the business holding the patent is the only one that can use the patented idea. If the idea sells well with customers, the original business can corner the market and use the patented idea to produce profits.
Patents last for a specific amount of time, and usually for at least several years. Businesses are able to renew some types of patents for even longer. This space of time before competitors can start copying the patent gives the original business time to analyse its own idea, make improvements, and add new features (which can also be patented). This provides a competitive advantage even when the patent runs out.
A patent gives a business the ability to make extra profit in several different ways. The patent acts as an asset for the business, and like other assets it can be sold to produce extra profit. Business can license out or sell their patent ideas to other companies.
First Mover Issues
One disadvantage of a patent is that patent-holding companies are often first movers, or the first ones to enter or create a market with a new idea. The first mover position has many disadvantages. The business must deal with customer needs and concerns that no one has encountered before. Competitors, meanwhile, can watch the pioneering business and learn from its potentially costly mistakes.
Competitor Product Creation
Patents only partially protect a product idea. Competitors who see a successful product can often copy it just enough to avoid a patent infringement lawsuit by producing a similar version, but using different materials and designs. This makes the patent essentially useless, especially if competitor products prove better than the originals.
A company that holds a patent must be willing to defend it. It must investigate competitor products and be willing to spend the time and money to bring competitors to court over patent violations. Businesses may not have the time to spend defending the patent in this way.
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