James DeLong previously mentioned Professor Robert Merges' article on software patents, entry and innovation. In that paper, Merges cited the pattern of entry for firms into new markets where incumbents hold patents, as indication of a thriving software industry .

Patent scholars agree that introduction of new firms is strongly associated with technological change and new products/services. Now, research by Professors Iain Cockburn and Megan MacGarvie from Boston Univ., and the National Bureau of Economic Research, adds to this theoretical understanding and also complements Merges's previous findings. Entry, Exit and Patenting in the Software Industry (October 2006), NBER Working Paper No. W12563. The article is extensive- drawing from a database of nearly 20,000 companies in 27 tech markets spanning 1990-2004.

Cockburn and MacGarvie find a solid correlation between patents and firms’ ability to enter and survive in markets. Firms are three times more likely to enter markets for which they hold patents, and over three times more likely to stay in those markets compared to non-patent holders. Further, though barriers may exist from patents held by incumbents, these are offset by advantages entrants gain coming into a market with patents at the outset.

Excerpts explaining possible alternative findings show that Cockburn and MacGarvie considered and tested hypotheses contrary to their conclusion.

In industries such as software, with a rapid underlying pace of technological change and an active entrepreneurial sector, any blocking or stifling effect of patents should benefit incumbents at the expense of entrants, and ought to be visible in decreased rates of entry, exit and turnover of firms.

On the other hand, in complex industries like software, patents may increase rates of entry, through mechanisms such as signaling the quality of entrants’ technology in a way that improves their ability to gain access to financing… giving entrants quick access to profits through licensing…

With the myriad complexities of patent economics, entry analysis gives a simple but essential indication of the impact of patents. The consensus right now, is that the net influence of software patents on the industry is a positive one where incumbents have to compete against new firms entering the market at productive rates. Software patent critics would need to stretch a lot of arguments to challenge the positions of Merges, Cockburn and MacGarvie.