Intellectual property rights (IPRs) are granted by governments to attempt to correct a market failure that produces less than optimal amounts of investments in innovative activity. Patents are used to protect products and processes. It is often less costly to reverse engineer a product than to undertake the research and development (R&D) to create the innovation. In the absence of any laws preventing companies from engaging in reverse engineering or similar activities and then marketing their copies, all firms would with to be the "copy-cat" firm and soon there would be no innovations to copy. Innovations are viewed as a very important factor in increasing welfare for societies. IPRs grant the owner the exclusive right to prevent a third party from using, reproducing, selling, exporting or importing the product or process that is protected. In exchange, the owner must disclose all information relevant to duplicating the product or process. This provides the firm with a temporary earn monopoly rents. In exchange for exclusive marketing rights, their acquired knowledge is made available to the public. The potential profits available to a firm induce it to undertake expensive and risky R & D.
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