Patent Auctions

Abstract

In his famous paper advancing a prospect theory of patents, Edmund Kitch found inspiration in, but quickly dismissed, a footnote authored by Yoram Barzel suggesting that rights to inventions might be distributed through an auction mechanism. Kitch maintained that the patent system itself achieves the benefit of an auction by giving control over the inventive process at a relatively early stage. The patent system, moreover, avoids the need for governmental officials in an auction regime to define the boundaries of inventions that have not yet been created.

Patent auctions, however, may be more appealing if the auctions are for rights to inventive fields, rather than to specific inventions. Indeed, an auction system may be seen as an extreme version of the prospect theory approach, by allowing patents to be issued at an earlier stage and with broader scope than is feasible in a conventional patent system. Like prospects generally, auctions could help avoid the costs associated with duplicative patent races and with inventing around existing patents.

An additional advantage of auctions is that variations in the design of the auction mechanism can help respond to specific concerns about the prospect approach. For example, an auction awarding a patent to the party that agrees to commit the most resources to a particular technological field may alleviate concerns that the prospect approach could stifle rather than stimulate innovation. Similarly, to mitigate concerns about deadweight loss, the government could sponsor an auction in which the field is awarded to the party that, in addition to paying a set amount of cash, agrees to charge the lowest price or hold the patent for the shortest term.

The analysis, however, identifies a number of empirical uncertainties that together provide an uneasy case for the status quo. A principal problem is that there exists a fundamental tradeoff in auction design, between approaches that maximize the auction winner's incentive to develop inventions within the scope of the patent grant and approaches that most effectively reduce deadweight loss. There is no guarantee that the government would optimally resolve these tradeoffs ex ante. Although governmental officials ex post could compare bids that offer combinations of commitments to development and concessions on price, this approach too is prone to error. The government also faces a daunting informational task in determining when to hold a patent auction.

The danger of governmental errors suggests that if patent auctions are to have any place in our innovation policy, they must avoid governmental discretion in determining when auctions should occur and in identifying the most attractive bidders. An ambitious approach might be to use information markets to make both such determinations, though it may be too early in the history of information markets to assess whether they are up to the task. A more modest approach would allow patentees to demand auctions that would provide additional patent scope, with the caveat that a patentee would need to substantially outbid others to win such an auction, and failing victory would be fined.

Keywords: intellectual property, patent, auctions, patent prospect theory

JEL Classification: O34