Patent Auctions

The New York Times offers an interesting article on the development of patent auctions. A patent is a legal monopoly to sell a product or process (to make a product or service or make it better) for a specific time period. In many cases, individuals or firms that are awarded a patent cannot make the final product themselves, so they try to license their patented technology to those who can, for instance the personal alarm patent in the article above.

If the other firms do not agree to the license fee, and go ahead with a similar innovation, the most common recourse is to litigate for patent infringement. The problem is that it is time-consuming and expensive, and there is no guarantee that the court judge in favor of the patent holder. Additionally, if the court does agree with the patent holder, there is a long drawn out time period where the value of the patent is determined, and this is done sometimes by the court, which most likely will not be a market valuation.

Since the patent holder's goal is to make a profit on the patented innovation - usually through a licensing agreement with another firm, another option is opening up for patent holders, and that is to sell the patent off in an auction - much like eBay does for well most everything.

The economically interesting part of this is that the value of the patent will be determined by auction bidders as opposed to the court or to a negotiated settlement with only one firm or group on the other side of the table. This should allow for a more efficient allocation of patented ideas to enter the marketplace and increase social welfare with better, more efficient products or processes.