When Second Comes First: Correcting Patent's Poor Secondary Incentives Through an Optional Patent Purchasing System

Abstract:     
The patent system encourages innovation by giving inventors temporary monopoly rights over their inventions and the monopoly profits that accompany them. However, monopolists earn their profits by raising prices and restricting output relative to competitive levels. This artificially encourages the development of substitutes for, and discourages the development of complements to, the patented good. For example, the majority of pharmaceutical research dollars are now spent on "me-too" drugs, which have medicinal properties that are similar or identical to existing, commercially successful products. Subsidies, the traditional economic response to this problem, can be extremely expensive and difficult to calibrate. This Article proposes a new solution: a mechanism through which the government makes voluntary, arm's-length purchases of certain patents, then makes the technology freely available. This system would produce economically efficient incentives for the development of complements and substitutes while preserving inventors' incentives to innovate. While this approach is not suitable for general application, there are certain areas, such as pharmaceutical patents, in which it may offer significant benefits.

Number of Pages in PDF File: 64

Keywords: Intellectual Property, Patents, Prize Systems, Law and Economics, Subsidies, Patent Purchasing

JEL Classification: O31, O34, O38

Accepted Paper Series