Prizes spur innovation comparatively better than patents – higher publicity, more contestants, more follow-on innovation, and they avoid deadweight loss from monopoly pricing

Analysts have identified a number of benefits that prizes have over other incentive systems, especially patents. A primary advantage is that prizes can encourage researching technologies that markets do not value sufficiently. 254 Markets fail to encourage the development of technologies whose market prices do not reflect their value. 255 Prizes (and grants) "reward innovations that 'are publicly valued but not privately marketable.'" 256 A government prize, for instance, is essentially a government intervention into the markets where they have failed to sufficiently incentivize a public good. 257 Prizes are also [*31] well suited to encourage high-risk research on technologies that are still at their earliest stages. 258 Similarly, they might also be well suited to encouraging research in circumstances where scientific opinion is divided concerning the appropriate path to direct technological development. 259In other words, prizes fit circumstances where goals are clear, but the best paths to achieve them are less certain. 260 A number of competitions have demonstrated this pattern. Specifically, the Longitude Bill, the Netflix Prize, and the Progressive Insurance Automotive X Prize all involved identifiable goals where the means to achieve them were uncertain. 261 By establishing criteria that encourage research in particular areas, prizes can offer ex ante incentives to pursue a targeted objective. 262 Finally, by setting criteria that suggest a particular result, organizers can signal the importance of a particular issue. 263

Prizes also avoid the deadweight loss of patents. 264 Unlike the X Prize Foundation's provisions, organizers of other prizes usually require winners of traditional prizes to place their intellectual property into the public domain. 265 Consequently, if the proceeds from prizes are comparable to the returns inventors would receive from patent rights, then inventors receive fair compensation while the public gains ready access to their inventions without incurring the deadweight loss of monopoly patent rights. 266 In programs like those of the X Prize Foundation, which allow innovators to retain their patent rights, the prizes augment the rewards of the patent system. 267 This may be especially helpful where markets do not price in the social value of innovations because the prizes can help to close the gap between investment cost and market compensation. 268

Another advantage of prizes is that they often broaden the pool of [*32] prospective innovators. Prizes attract

persons who might not otherwise engage in commercial efforts 269 or who might not otherwise have pursued

a particular field. 270 The competitive nature of prizes may also attract new parties interested in pursuing the

awards. 271 As with the Longitude Act, prizes can attract parties who might normally not be among the

anticipated pool of prospective inventors. 272Also, by broadening the range of participants in the competition,

prizes bring the advantages of diversification to the efforts, thereby increasing the likelihood that the competition

will generate solutions to the problem. 273 Prizes broaden the pool of participants in part because they also

bring attention to their subject matter. 274

The publicity surrounding prizes appears to be a significant advantage that they provide. Prizes can both

generate interest in a topic and add to the prestige of participants. 275 Indeed, historical analysis suggests that

the publicity from prizes without cash awards can encourage innovation. 276 One result of publicity is that it

attracts additional inventors to the subject. 277Furthermore, prizes often signal to other possible inventors the

significance of innovation in a particular area. 278

Unlike patents, prizes do not impede - and can support - follow-on innovations. As discussed previously, the

exclusive rights and monopoly pricing of the patent system can deter follow-on innovations. 279 Empirical

evidence indicating that patents deter such innovations suggests that prizes would be more favorable to them.

280Similarly, assuming that large awards encourage substantial research efforts for breakthrough inventions,

organizers can use a series of smaller prizes to encourage follow-on inventions. 281