Prices and Dynamic Gains in Markets for Patents: Experimental Study of Impersonal Exchange in Ideas

The question of how prices on patent rights should be determined in impersonal exchanges is examined in a laboratory environment. Dynamic gains from such organized exchange with public prices are recorded. The experiment introduces a competitive demand-side market with impersonal exchange mechanisms and transparent (public) prices in the traditionally hierarchical and personal exchange environment of patents. A tradable linear contract (fixed fee plus royalty on revenues) is investigated in a dual study together with three mechanism designs for demand-side bidding using two levels of presumed legal validity of the underlying patent. An intermediary investor firm (Trader) can split these contracts, useful for multiple “industries,” creating dynamic gains, potentially increasing the use of technology in the economic system as a whole. Previous research on licensing has mostly been limited to one-dimensional auction mechanisms or static environments without institutions or specialized agents for inventing, intermediation (of which there are hundreds if not thousands), and innovation. The experimental results indicate that agents appear to price the blocking value in the fixed fee and the investment value, net what is paid in fixed, in the royalty component, supporting the proposed theory of prices outlined in Chap. 2 . Risks are then shifted from the Inventor toward the consumer by means of the producer market (as risk is shared over more paying consumers), increasing the incentives for investment in inventions, potentially resulting in a more competitive technology market, and a more efficient economic system as a whole. The results give indications on proper integration of information and rules for mechanisms for organized market on patents with transparent prices to give incentives for institutional behavior resulting in dynamic gains. It also shows that intermediaries (Traders) are critical to achieve the dynamic gains from the system, as is highly presumed validity of patents.