Market Outcomes and Dynamic Patent Buyouts

Alberto Galasso, Matthew Mitchell and Gábor Virág ()
Authors registered in the RePEc Author Service: Matthew Mitchell and Matthew D. Mitchell ()

No 9847, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Patents are a useful but imperfect reward for innovation. In sectors like pharmaceuticals, where monopoly distortions seem particularly severe, there is growing international political pressure to identify alternatives to patents that could lower prices. Innovation prizes and other non-patent rewards are becoming more prevalent in government's innovation policy, and are also widely implemented by private philanthropists. In this paper we describe situations in which a patent buyout is effective, using information from market outcomes as a guide to the payment amount. We allow for the fact that sales may be manipulable by the innovator in search of the buyout payment, and show that in a wide variety of cases the optimal policy still involves some form of patent buyout. The buyout uses two key pieces of information: market outcomes observed during the patent's life, and the competitive outcome after the patent is bought out. We show that such dynamic market information can be effective at determining both marginal and total willingness to pay of consumers in many important cases, and therefore can generate the right innovation incentives.

Keywords: Buyout; Innovation; Mechanism design; Patents (search for similar items in EconPapers)
JEL-codes: D82 L51 O31 (search for similar items in EconPapers)
Date: 2014-02
New Economics Papers: this item is included in nep-com, nep-cta, nep-ino, nep-ipr and nep-pr~
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Market outcomes and dynamic patent buyouts (2016)
Working Paper: Market Outcomes and Dynamic Patent Buyouts (2014)
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