Market Outcomes and Dynamic Patent Buyouts

44 Pages Posted: 25 Aug 2013 Last revised: 11 Aug 2014

See all articles by Alberto Galasso

Alberto Galasso

University of Toronto - Rotman School of Management; University of Toronto - Strategic Management

Matthew F. Mitchell

Rotman School of Management

Gabor Virag

University of Toronto - Rotman School of Management

Date Written: January 21, 2014

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: innovation, patents, buyouts, prizes, mechanism design

JEL Classification: D43, D82, L51, O31

Suggested Citation

Galasso, Alberto and Mitchell, Matthew F. and Virag, Gabor, Market Outcomes and Dynamic Patent Buyouts (January 21, 2014). Rotman School of Management Working Paper No. 2315270, Available at SSRN: https://ssrn.com/abstract=2315270 or http://dx.doi.org/10.2139/ssrn.2315270

Alberto Galasso (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/facbios/viewFac.asp?facultyID=alberto.galasso

University of Toronto - Strategic Management ( email )

105 St George Street
Toronto, ON M5S 1L2
Canada

Matthew F. Mitchell

Rotman School of Management ( email )

Toronto, Ontario M5S 3E6
Canada

Gabor Virag

University of Toronto - Rotman School of Management ( email )

105 St George Street
Toronto, Ontario M5S 3G8
Canada
416-978-4423 (Phone)

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