Manipulation, collusion, and misallocation of resources can prevent the success of patent buyouts

Perhaps the most obvious approach to assessing the social value of an invention is to measure use of the product by consumers. This might be accomplished either by forcing some consumers to pay for the product or to consider purchases by consumers of the product once it is placed in the public domain. Guell and Fischbaum (1995, p. 225), who propose patent buyouts for pharmaceutical products, suggest that the pharmaceutical be sold initially in a test market. Shavell and van Ypersele (2001) suggest that the government wait until the product is placed in the public domain and the government observes the goods sold. This approach runs into at least three significant difficulties. First, there is not an identity between a patented invention and a consumer product. Abramowicz (2003, p. 143). (There often is an identity, however, between a copyrighted work and a consumer product, so this approach may be easier to implement in the copyright context.) Often, many innovations are inputs into a single product, and an innovation may be an input into many different products. Hopenhayn et al. (2006, p. 1047). A further complication, identified by Chari et al. (2012), is that producers may have an incentive to manipulate market signals about the value of their inventions, for example by bribing other producers. Chari et al. conclude that the relative strength of patents and reward system depends on how costly it is for producers to manipulate market signals. Second, measurement can be difficult even when there is an identity between product and contribution. One problem, identified by Coase (1946) and applied to the patent reward context by Duffy (2004a), is that buyouts can cause misallocations of resources even where a good is used. For example, government transportation may lead consumers to live inefficiently far from a city. The fact that consumers take advantage of the transport does not mean that they value it at the cost of the production. The relevant question is how much consumers “would have demanded the good if government policy were different and they had expected to pay the full cost of the product.” (p. 43). Duffy points out that we should like to know the most that consumers would pay for a product, but “the government will have no data to answer that question because consumers are not paying full costs and never expected to do so.” (Duffy, p. 43). Meanwhile, manipulation by producers can cause distortions. Roin (2014, p. 1037 n.174, pp. 1059-60) observes that producers may sell goods below marginal cost to inflate apparent demand, not only thwarting value measurement but also leading to inefficient overuse. Third, even measurement of use may face administrative complications. For a pharmaceutical, whose use is probably considerably easier to measure than many other inventions’, we would need to be able to determine total manufacturing by generic firms, perhaps not an insurmountable problem but one requiring some degree of coordination. Sometimes, once use is known, it may be possible to estimate consumer value, subject to the objections above, but often, the government may take shortcuts, such as assuming benefits based on clinical trials. Hollis and Pogge (2008, pp. 30-31) point out that this approach may be flawed, because clinical trials may feature the consumers most likely to benefit from an invention.