Working Paper: CEPR ID: DP9847
Authors: Alberto Galasso; Matthew Mitchell; Gabor Virag
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
JEL Codes: D82; L51; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| hybrid system incorporating market power and cash prizes (D47) | better serve social welfare (I39) |
| buyout mechanism (G34) | extract information about consumer surplus and willingness to pay (D11) |
| buyout (G34) | innovation incentives (O31) |
| planner can observe market outcomes effectively (D41) | design a buyout scheme that generates greater welfare (D69) |
| market competition after a buyout (L13) | enhance innovation incentives (O31) |
| design of the reward mechanism (D47) | level of innovation incentivized (O31) |