Coordination of Inventions and Innovations Through Patent Markets with Prices

Abstract

This article examines the coordination of inventor, trader, and innovator decisions through a market in contracts on patents with prices, focusing on the willingness to search (WTS) for new and uncertain patentable technology, using a controlled laboratory experiment. Typically an implicit hierarchical approach, i.e., coordinating inventor and innovator decisions in a single firm, is assumed or used in analyzing these relationships, in particular in Arrow (1962) where allocation of resources for invention is discussed under neoclassical conditions of perfect information and competitive commodity (not technology) markets. Schumpeter also assumes a hierarchy as coordinating mechanism, as entrepreneurial firms disrupt incumbents (1934) or intrapreneurs create disruptive product and service innovations within firms ( 1942) treating technology as an exogenous force. In this analysis, coordination takes place between specialized agents through a design market based on the principles and practices of real world patent systems. WTS is compared between three institutional designs with different demand side bidding language, in environments with “weak” and “strong” patents in a 3 × 2 design. Technology “tastes” is here a learning process through prices (“price signals”) and can be altered (discovered) by the inventor agent within a searchable area. The results indicate that WTS appears more sensitive to mechanisms (institutional design) than patent validity (environment) in this dynamic economic system. This main finding thus suggests that policy efforts ought to be placed on institutional mechanisms together with environment such as enforcement, where the mechanisms with richer demand-side bidding language appear to matter more than enforcement in explaining WTS, i.e., risk taking. Regarding economic performance, patent validity was (naturally) of major importance, but (surprisingly) no significant effect of institutions (at least long run). These results may provide elements to expand economic theory of the patent system when it comes to treatment of risk.