A Dynamic Microeconomic System Design for Markets in Patents

Abstract

We are well familiar with the economic analysis of a patent system in terms of a temporary monopoly on products, typically benefitting from marginal process inventions, formulated under conditions of certain future demands and fully excludable rights. This chapter develops an experimental and dynamic microeconomic model useful for studying the patent system as a trade – exchange – system, where patented technology is exchanged in organized competitivemarkets, under uncertain future demands and limited presumed validity on patent rights. An economic system design is developed to study transparent (public) priceson patents, dynamic gains from using a patent in multiple industries and the coordination of invention, intermediary (Trader) and innovation activities using a linear contract on patents (fixed fee plus royalty on future revenues). An intermediary Trader, or Investor, is introduced together with Inventor and Innovator agents in order to multiply the value (usage) of the technology. Three mechanism designs (institutions) and two levels of presumption of validity of the underlying patent right are proposed. The analysis differs from the previous work on patents, trade, and economics in that the focus is on the competitive pricingof the rights themselves, using demand-side bidding. An informal theory is outlined for pricing the dual values of a patent (investing and blocking). Based on this proposition, tentative hypothesis are outlined for two experiments using the outlined economic system design. The research thus attempts to shed light on the dynamicgains from coordination of development, trade, and use of patented technology between hierarchies through markets with prices. The general theme adds to understanding of a transition from personal exchange to an impersonal exchange in technology.