Tesla’s Patent Giveaway Isn’t Altruistic—And That’s Not a Bad Thing

Tesla Motors recently announced that it is opening its electric car patents to competitors. The buzz around the Internet is that this is another case of Tesla’s CEO Elon Musk doing something good for humanity. However, the evidence suggests another explanation: Tesla is doing this to make money, and that’s not a bad thing.

The issue Tesla faces is what game theorists call a coordination problem. Specifically, it is a stag hunt:

For those unfamiliar and who did not watch the video, a stag hunt is the general name for a game where both parties want to coordinate on taking the same action because it gives each side its individually best outcome. However, a party’s worst possible outcome is to take that action while the other side does not. This leads to two reasonable outcomes: both coordinate on the good action and do very well or both do not take that action (because they expect the other one not to) and do poorly.

This is a common problem in emerging markets. The core issue is that some technologies need other technologies to function properly. That is, technology A is worthless without technology B, and technology B is worthless without technology A. Manufacturers of A might want to produce A and manufacturers of B might want to produce B, but they cannot do this profitably without each other’s support.

Take HDTV as a recent example. We are all happy to live in a world of HD: producers now create a better product, and consumers find the images to be far more visually appeasing. However, the development of HDTV took longer than it should have. The problem was that producers had no reason to switch over to HD broadcasting until people owned HDTVs. Yet television manufacturers had no reason to create HDTVs until there were HD programs available for consumption. This created an awkward coordination problem in which both producers and manufacturers were waiting around for each other. HDTV only became commonplace after cheaper production costs made the transition less risky for either party.

I imagine car manufacturers faced a similar problem a century ago. Ford and General Motors may have been ready to sell cars to the public, but the public had little reason to buy them without gas stations all around to make it easy to refuel their vehicles. But small business owners had little reason to start up gas stations without a large group of car owners around to purchase from them.

The above problem should make Tesla’s major barrier clear. Tesla has the electric car technology ready. What they lack is a network of charging stations that can make long-distance travel with electric cars practical. Giving away the patents to competitors potentially means more electric cars on the road and more charging stations, without having to spend significant capital that the small company does not have. Tesla ultimately wins because they have a first-mover advantage in developing the technology.

So this is less about altruism and more about self-interest. But that is not a bad thing. 99% of the driving force behind economics is mutual gain. I think this fact gets lost in the modern political/economic debate because there are some (really bad) cases where that is not true. But here, Tesla wins, other car manufacturers win, and consumers win.

Oh, oil producing companies lose. Whatever.

H/T to Dillon Bowman (a student of mine at the University of Rochester) and /u/Mubarmi for inspiring this post.

2 responses to “Tesla’s Patent Giveaway Isn’t Altruistic—And That’s Not a Bad Thing

  1. Is this the same situation as the NHL mandating helmets to prevent concussions? All players would want to limit concussions, but nobody wants to give up the advantage of a better sight line by wearing one when other players are not wearing them, and so the solution is to have an outside party, the NHL, mandate everyone use them, keeping the playing field level.

    • That seems more like a collective action problem. Everyone prefers a safer game, but each individually prefers taking the risk to increase their chances of winning. So creating the rule mandates that all parties take the cooperative action, leaving everyone better off than before.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s