Economic growth ultimately depends on the production of new ideas, but competitive markets do not provide appropriate incentives for the production of ideas.Read more at location 3506
Historically, societies have used a wide variety of mechanisms to encourage production of ideas. Some, such as patents and copyrights, provide inventors with monopolies over goods produced using their ideas. Others, such as the National Science Foundation (NSF) and the synthetic fuels program, directly subsidize research.Read more at location 3507
Patents and copyrights create insufficient incentives for original research because inventors cannot fully capture consumer surplus or spillovers of their ideas to other researchers. Patents and copyrights also create static distortions from monopoly pricing and encourage socially wasteful expenditures on reverse engineering to invent around patents. Read more at location 3510
before research is conducted, the government may not know the costs and expected benefits of research, and it may not even be able to conceive of some inventions. Allowing government officials wide discretion to set payments to inventors ex post may lead to rent seeking and to expropriation of investors after their research costs are sunk. Read more at location 3513
In 1839, the government of France combined elements of the patent system and of direct government support of research by purchasing the patent for daguerreotype photography and placing the technique in the public domain. After the patent was bought out, daguerreotype photography was rapidly adopted worldwide and was subject to myriad technical improvements.Read more at location 3515
A major challenge for any system of patent buyouts is determining the price.Read more at location 3517
government would offer to buy out patents at this private value times a fixed markup that would roughly cover the difference between the social and private values of inventions. Inventors could decide whether to sell or retain their patents.Read more at location 3518
However, in order to provide auction participants with an incentive to truthfully reveal their valuations, the government would randomly select a few patents that would be sold to the highest bidder. Encouraging innovation through such a mechanism would require more discretion by government officials than the current patent system but substantially less discretion than that exercised by, say, the National Institutes of Health.Read more at location 3520
Macfie (1869), a member of the British Parliament in the nineteenth century, proposed replacing the patent system with a reward system. In this century, Polanyi (1943) suggested replacing patents with rewards based on ex-post estimates of the value of inventions. Guell and Fischbaum (1995) suggest that the government use its power of eminent domain to purchase pharmaceutical patents. They propose that judges determine the buyout price. One problem with allowing broad administrative discretion over the patent buyout price is that this may lead to purchases at confiscatory prices and thus reduce incentives for innovation. Allowing broad discretion may also lead to wasteful expenditures on rent seeking,Read more at location 3523
This chapter describes how a market mechanism could be used to determine the value of patents.Read more at location 3528
Patent buyouts would thus supplement, rather than replace, the existing patent system. Inventors would receive a markup over the private value of the patents to bring incentives for invention closer to the social value.Read more at location 3529
One problem with a fixed reward is that people could claim rewards for trivial inventions.Read more at location 3532
Perhaps the chief problem with patent buyouts is that they are potentially vulnerable to collusion, because inventors could bribe auction participants to submit high bids.Read more at location 3538
patent holders would have an incentive to bribe auction participants to bid high.Read more at location 3751
It is impossible to eliminate collusion, but, as subsection VILA explains, a variety of mechanisms could be used to minimize collusion.Read more at location 3752
The government could make collusion more difficult using standard procedures such as requiring bids to be sealed, punishing companies and individuals found guilty of collusion, and rewarding whistle-blowers.Read more at location 3754
The government would base the price it offers the inventor on the third highest bid. The original patent holder would therefore have to bribe three companies instead of one to ensure a substantial increase in the buyout price.Read more at location 3756
suppose that, based on the other bids and any knowledge of the industry, the government's best estimate of the patent's value was it. If a bidder offered it + x and the agency suspected collusion," the government could offer to buy out the patent at it + $1 and then require the suspected colluding bidder to purchase the patent at its bid of it + x. The government would make a profit of x - 1 from the attempted collusion.Read more at location 3759
The government could develop lists of suspect bidders by checking whether winning bidders made money,Read more at location 3762
bidders would have to provide information on any ties they had with the inventor.Read more at location 3763
Bidders could be required to pay a licensing fee or deposit allowing them to participate in a number of auctions. This would make it unprofitable for patent holders to set up dummy companiesRead more at location 3764
inventors would be prohibited from buying back the patent from the winning bidder or making other payments to bidders.Read more at location 3768
there are several ways that governments could establish ceiling prices and thus reduce the risk of paying vastly inflated sums for patents.Read more at location 3774
it is also important to remember that many institutions that are theoretically vulnerable to collusion operate relatively well. For example, peer review is highly vulnerable to collusion, yet the NSF and NIH seem relatively effective.Read more at location 3794
Even if collusion raises patent prices above their social value, the social value of inventions may be approximated better by the collusive price than by the existing patent system,Read more at location 3798
The auction mechanism described in this chapter may be appropriate for many pharmaceuticals, but it would not be appropriate in industries where markets are too thin for auctions or patents are not an effective means of protecting inventions. In such industries, the government could simply offer to buy out patents for an amount equal to postbuyout sales times an administratively determined estimate of the average consumer surplus per unit of the good consumed. Read more at location 3802
