Patent buyouts enhance innovation – historical examples prove

Incentives for marketing and development are likely to be enhanced by patent buyouts. Suppose that the private value of a patent is p(E), where E denotes expenditures on development and marketing. In the absence of patent buyouts, patent owners will invest in development until p/E 5 1. Patent owners who expect to sell their patent at a markup of M will invest until p/E 5 1/M. Inventors would be free to delay patent sales to first undertake development and marketing if they wished. Some opportunities for further development may appear only after patents have been sold. For example, technological advances in related fields may open up new opportunities for development after the patent has been bought out. Patent buyouts will strengthen incentives for this further development if it can be patented or appropriated in some other way. This is because the market for a complementary invention will be larger if the original invention is sold at marginal cost. Moreover, the developer of the complementary invention will not have to split its value with the original inventor or take the risk that unresolved patent disputes with the original inventor will block new complementary products. Although patent buyouts increase inventors’ incentive to conduct development prior to the buyout, and increase others’ incentives to conduct development after the buyout, they reduce inventors’ incentives to conduct unpatentable development after patent buyouts. For example, pharmaceutical firms have much less incentive to test for new uses for generic drugs than for patented drugs. In practice, there may be other ways of appropriating investment in marketing and development. For example, some aspirin manufacturers have sufficient market power that even without patent protection they advertise aspirin’s effectiveness in preventing heart attacks. The substantial technological improvements to the Daguerreotype process and the cotton gin after the patents were bought out provide at least some suggestion that patent buyouts do not generally greatly discourage further technological development. In any case, pharmaceuticals typically need little new development after they have been approved by the FDA.9