Patent buyouts can stimulate innovation, reduce wasteful research and eliminate the monopoly pricing distortions created by the IPR regime

Previous sections have examined the potential of patent buyouts to supplement our current system of promoting innovations through patents and direct government support of research. The government could offer to buy out patents at their private value, as revealed by an auction, times a markup designed to cover the difference between the private and social values of inventions. This mechanism involves more government discretion than the current patent system, but substantially less discretion than government funding of research through the NSF or NIH. Patent buyouts could potentially increase incentives for original invention closer to their social value; reduce incentives for wasteful ‘‘me too’’ research; and eliminate monopoly pricing distortions. On the other hand, patent buyouts could also cause a number of problems, including collusion to raise buyout prices. When new institutions are proposed, there is a natural tendency to focus on their potential risks and shortcomings. However, it is also important to recognize that existing mechanisms of encouraging innovation have serious flaws. In an 1851 editorial (cited by Dutton [1984]) urging that patents be abolished, The Economist wrote that the granting of patents ‘‘inflames cupidity, excites fraud, stimulates men to run after schemes . . . begets disputes and quarrels betwixt inventors, provokes endless lawsuits [and] makes men ruin themselves for the sake of getting the privilege of a patent, . . .’’All this is true, and yet it seems clear that the world is much better off with patents than without them. The same may be true for patent buyouts. Since it is difficult to gauge the effects of patent buyouts based on theory alone, and since large-scale patent buyouts would be risky, it might be useful to first try patent buyouts on a limited basis. Such a trial could help determine whether inventors would sell their patents, and whether bids would be substantially greater than realized profits or revenues, as would be the case if collusion were severe. This would help policy makers judge whether patent buyouts should be abandoned, redesigned, or used more widely. Pharmaceuticals are a natural area to try patent buyouts, since markets would be relatively competitive in the absence of patents; patent protection is effective; monopoly markups are large; drugs are nondurable; ‘‘me too’’ inventions are widespread; and considerable information is generated during FDA trials, so potential bidders could make informed bids.17 Moreover, because many pharmaceutical patents are valuable, the administrative costs of the system are likely to be small relative to the benefits of patent buyouts. Once FDA approval has been granted, little new development is typically required. Finally, buying out pharmaceutical patents is likely to have benign distributional consequences, whereas buying out, say, patents for improved yachts will not. Financing pharmaceutical research through patents places the financing burden on disease victims. If disease incidence is random, and not fully insurable, people will prefer ex ante to insure themselves by funding the research out of general tax revenue. The system could initially be applied to treatments for a few specific diseases considered to be particularly important, or particularly subject to problems resulting from the patent system. Orphan drug legislation provides a precedent for establishing special rules for drugs designed to treat particular diseases.