Working Paper Series in Economics and Institutions of Innovation,
Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies

Abstract: The question of how prices on patents rights should be determined in impersonal exchanges is examined in a laboratory environment. Dynamic gains from such organized trade with public prices are recorded. The experiment introduces a competitive market with impersonal exchange mechanisms and prices in the traditionally hierarchical and personal exchange of patents. A tradable linear contract (fixed fee plus royalty)is investigated with three mechanism designs for demand-side bidding and two levels of presumed legal validity of the underlying patent. A “trader” can split contracts useful for multiple “industries,” creating dynamic gains, potentially increasing the use of technology in the economic system. Previous research on licensing has mostly been limited to one-dimensional auction mechanisms or static environments. The results indicate that agents appear to price the blocking value in the fixed fee and the investment value, net what is paid in fixed, in the royalty component, supporting a proposed theory of prices. Risks are thereby shifted from the invention to the consumer by means of this producer market, increasing the incentives for investment in invention, potentially resulting in a more competitive technology being developed and a more efficient economic system. The results give indications on proper integration of information and rules for mechanisms for organized market on patents with transparent prices. It also shows that intermediaries (traders) are critical to achieve dynamic gains from the system as are high presumed validity of patents.

Keywords: patents; trade; licensing; intellectual property; experiments

JEL-codes: D02; D23; L14; L24; O32; O34

44 pages, August 25, 2010

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