Just think, quicksort would have been patented. Or binary trees, or arrays.
The horror scenario that you give is just a bad example that could have been constructed by patent attorneys.
Of course you can not just rip-off the software of a competitor, because the software itself is copyrighted.
We all are profiting from the fact, that many things in the software world are just not patented. Because in the knowledge world and more so in the software world, nobody just sits on his island and makes something totally new ... everybody depends on the work of others.
The patent system taken to extreme: Only a handful companies dominate the market and nobody else can do anything anymore. As much I understood, in the hard disk business we have this situation already -- three to five big corporations dominating the market, because they own the key patents.