Collusion is not a concern – several mechanisms exist to mitigate the potential for it to disrupt pricing

The auction mechanism is potentially vulnerable to collusion, since patent holders would have an incentive to bribe auction participants to bid high. The bidder would only have to pay the government with probability p. However, with 100 percent probability, the patent holder would receive an inflated payment. It is impossible to eliminate collusion, but, as subsection VII.A explains, a variety of mechanisms could be used to minimize collusion. Subsection VII.B discusses how the prices paid by the government for patents could be limited by ceiling prices based on actual sales of the patented pharmaceutical. VII.A. Mechanisms for Preventing Collusion The government could make collusion more difficult using standard procedures such as requiring bids to be sealed, punishing companies and individuals found guilty of collusion, and rewarding whistle-blowers. This would make collusion more difficult and more dangerous. Several additional methods specific to patent buyouts could also be used. 1. The government would base the price it offers the inventor on the third highest bid. The original patent holder would therefore have to bribe three companies instead of one to ensure a substantial increase in the buyout price. This should significantly increase both the difficulty of collusion and the chance of detection. 2. The agency purchasing patents could have authority to call the bluff of suspected overbidders by reducing the markup and selling to the high bidder without randomization in a set percentage of cases. For example, suppose that based on the other bids, and any knowledge of the industry, the government’s best estimate of the patent’s value was p. If a bidder offered p 1 x and the government suspected collusion,15 the government could offer to buy out the patent at p 1 $1, and then require the suspected colluding bidder to purchase the patent at its bid of p 1 x. The government would make a profit of x 2 1 from the attempted collusion. 3. The government could develop lists of suspect bidders by checking whether winning bidders made money, since systematic overbidders would incur big losses. 4. To prevent inventors from forming front companies and having them submit high bids, bidders would have to provide information on any ties they had with the inventor. Bidders who lied about financial ties with the inventor would be subject to prosecution. 5. Bidders could be required to pay a licensing fee or deposit allowing them to participate in a number of auctions. This would make it unprofitable for patent holders to set up dummy companies simply to bid on their own patents. Excluding bidders will be costly if there are only a few potential bidders, but there will often be many potential bidders, because it is straightforward to manufacture most drugs, as evidenced by the fact that there are often many different producers of generic drugs. (For example, fourteen firms produce oral albuterol sulfate.) Any system of patent buyouts that relies on auctioning patents should focus on drugs that are easy to produce, rather than those which require complicated manufacturing facilities. 6. To prevent inventors from developing a reputation for buying back their patents at inflated prices, inventors would be prohibited from buying back the patent from the winning bidder, or making other payments to bidders. Preventing these side payments might be one of the most difficult aspects of preventing collusion. At least in the early years of any program of patent buyouts, the government agency administering the program would presumably have a budget for patent buyouts, and would not be able to afford all the patents that were available for purchase. One option would be to allow the agency to choose which patents to purchase, so that if the price for a particular patent was too high, it could decline to purchase the patent and cancel the randomization. This would tend to reduce collusion because raising the patent buyout price would reduce the chance that the patent would be bought out.