Coordinating Inventing and Innovating Through Markets in Patents with Prices: Experimental Study of Institutional Behavior and Price Signals

Abstract

The patent system provides the property rights for organized markets in patents with transparent prices. Such prices are here investigated as signals for Inventors, intermediaries (Traders), and Innovators alike of valuable and searchable technology areas, in an experimental study. They inform decisions of specialized inventor firms on allocation of resources for invention given a search space of induced technology values. The traditional hierarchical model of coordinating invention and innovation in a vertically integrated firm is replaced by coordination of these activities among specialized firms through a market with prices. Inventors, intermediaries (Traders), and Innovators participate in this exchange. The experimental study builds on the study focusing on price mechanisms with exogenous technology values described in Chap. 3 and expands that study to an economic environment with endogenous technology values (defined by a search space of nine possible technology focuses). The concept of willingness to search is related to search theory. The results show that coordination clearly takes place but differs significantly between the institutions and patent validity tested (a 3 × 2 design), except in one case for weak patents. As with the price study, demand-side bidding in both dimensions of the linear contract appears to yield the highest willingness to search for a more valuable technology, and thus the best chances for the allocation of resources for invention among the institutions and validity investigated. Multiple end-states are observed for such searches, especially for institutions with less demand-side bidding, indicating imprecise price signals (uncertainty in price between high- and low-value technologies), for institutions similar to today’s personal exchange mechanisms. Coordination through markets with prices appears to increase the dynamic gains of the patent system through price information that reduce or better inform about the risk and value in investments in new technology (informed by the technology focus).