University of Chicago Law Review

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Edmund Kitch's prospect theory of patents has been hailed as "one of the most significant efforts to integrate intellectual property with property rights theory," but it has also remained highly controversial, generating criticisms that it is "without foundation" and "little influenced by any concern for reality." Although the prospect theory correctly predicts that, by ending rivalry, a grant of intellectual property rights can encourage efficient management of the property, the theory has been unable to account for the fundamental role that rivalry has in the patent system. This Article explains that role. The key insight is that a patent race is not only a rivalry to claim patent rights, but also a rivalry to have those rights expire earlier. Patent races thus limit monopoly rents and increase the consumer surplus from the innovation. The patent system parallels a method of natural monopoly regulation proposed by Harold Demsetz, who suggested that competition for an exclusive franchise could be harnessed as a means of constraining the monopolist. The so-called "prospect" features of the patent system are important not so much because they eliminate rivalry but because they channel it in ways that maximize the social benefits from the monopoly. This approach explains the structure of patent rights in terms of property, competition, and natural monopoly theory.