Kremer’s patent buyout proposal accounts for the need to prevent collusive behaviors

The second-price auction, which is of crucial importance to the effective operation of patent buyouts, is potentially vulnerable to collusive behaviour between the patent holder and auction participants (Kremer, ). Patent holders have incentives to pay auction participants to make a bid that is higher than their true valuation of the patent to increase buyout prices (Kremer, ). Most of the purchased patents are placed in the public domain, whereas only a small fraction of them would actually be sold to the highest bidders. Hence, on the one hand, the bribed bidders would face a low probability of having to pay the patent authority. On the other hand, the patent holders would be confident of getting an inflated price. However, Kremer () points out several mechanisms for preventing collusive behaviour, for example, sealed bids, punishing colluding firms, or rewards for whistleblowers, among others.