Patent buyouts fail – political economy tradeoffs

In this paper, we consider two previously unstudied political economy tradeoffs that can arise due to how buyouts are financed and benefited from, and we explore how these can hinder the implementation of buyouts that would otherwise enhance global welfare. First, placing knowledge in the public domain in a multicountry world where not all countries can contribute equally to buyout financing would result in loss of profits for the financing country and in positive externalities for the rest of the world. Second, because buyouts are publicly financed, they may engender domestic conflict over the desired extent of tax financing, and such conflict will be influential if the government cares not simply about total welfare but about the welfare of politically important groups. In contrast, financing innovation through market sales of subsequent private goods (via patent power) circumscribes the global externality as well as the extent of dependence on public financing. Our results demonstrate that these global and domestic distributional issues constrain the pursuit of buyouts, potentially to the detriment of the innovating country’s and the world’s welfare. Our findings also elaborate on the interaction between the two aspects, i.e. that domestic politics can interfere with the otherwise optimal and feasible solution of a buyout internationally financed through transfers. We also discuss possibilities for, and challenges toward, institutional responses that may alleviate—albeit not completely eliminate—these distributional constraints.

The auction structure of patent buyout proposals suffers from hurdles of feasibility

Abramowicz, Michael B., Prize and Reward Alternatives to Intellectual Property (2019). Prize and Reward Alternatives to Intellectual Property, in Research Handbook on the Economics of Intellectual Property Law (P.S. Menell & B. Depoorter eds., forthcoming 2019). ; GWU Law School Public Law Research Paper No. 2019-13; GWU Legal Studies Research Paper No. 2019-13. Available at SSRN: https://ssrn.com/ abstract=3366608

A more complex problem that Kremer addresses is that different patents may be substitutes or complements. If two patents are complements, rewards may be too high if they are auctioned separately; given the high probability each of two perfect complements will be assigned to the public domain, the other will command nearly the full value of both together. Meanwhile, the value of one patent will be greatly lowered if a substitute patent will likely be placed in the public domain. Kremer responds by suggesting joint randomization, i.e. that all close complements and substitutes be auctioned simultaneously, with all either randomized to the public domain or to private ownership, though not necessarily by the same owners. This may, however, not always be administratively feasible, if different inventions are produced at different times.