17

Research Study on an Ideal Patent Purchase System toComplement the Patent System(*)
Research Fellow: Yusuke INAMI

Since a patent system gives exclusive rights to inventors, it hinders competition and causes social
inefficiency. Yet, we maintain the patent system despite this disadvantage. One of the reasons is its contribution
to the creation of technological innovations. Specifically, by clearly stipulating in the patent system that inventors
would be protected, encouragement of R&D investments is sought. However, it is not desirable to leave theproblem of social inefficiency caused by the patent system unaddressed. This research proposes a system thatwould complement a patent system in order to solve the aforementioned problem of inefficiency. More specifically,
this research proposes a patent purchase system. It also reveals cases in which the existence of a patent purchasesystem could reduce social inefficiency and discusses the relationship between a patent purchase system andcorporate R&D investment activities.

Ⅰ Introduction
Since the existing patent system gives
exclusive rights to inventors for a certain periodof time, it hinders competition and causes social
inefficiency. Yet, we maintain the patent system
despite this disadvantage. One of the reasons is
its contribution to the creation of technologicalinnovations. Specifically, by clearly stipulating in
the patent system that inventors shall beprotected, encouragement of R&D investments issought to accelerate technological innovation.
If non-patentees are permitted to use atechnology protected under a patent system, it
would promote competition and reduce social
inefficiency. The academic paper published byKremer in 1998 (the academic paper shallhereinafter referred to as "Kremer (1998)") was
the first to propose the idea that the government
should purchase patents and place them in the
public domain. Kremer (1998) argued that the
government, which has no information about thevalue of a patent, should obtain that informationfrom non-patentee companies and determine thepatent purchase price based thereon. Morespecifically, it proposed that a patent should besubmitted to an auction in which non-patentee
companies can participate. The second highest
bid would be multiplied severalfold and adopted
by the government as the patent purchase price.
In order to accurately evaluate the value of apatent, the system will be designed in such a waythat a patent will be transferred, with a fixedprobability, to the company that submitted thehighest bid. Under the system, the patentee
company would be permitted to decide whether
to accept the patent purchase price proposed by
the government.
If the government were to become apurchaser of patents, the patent purchase priceshould be lowered as much as possible. However,
Kremer (1998) has not conducted sufficient
analysis on this point. So we have conducted thisresearch and proposed a new patent purchasesystem in order to minimize patent purchaseprices, and have examined whether such a patentpurchase system would reduce social inefficiency.
In this research, we will propose a patentpurchase system that would allow thegovernment to purchase patents and place themin the public domain as described below. Since thegovernment has no information on the value of apatent, the government would have non-patentee
companies report an estimate of the patent value
and would determine the patent purchase pricebased thereon. Then, the government would
propose the patent purchase price to the patentee
company. The patentee company would beallowed to decide whether to accept the patentpurchase price proposed by the government. If
the patent is purchased, the government would
pay the patent purchase price. The non-patentee
companies also partially pay the patent purchaseprice.
We have found that, in a simple situation
involving only one patentee company and one(*) This is an English translation of the summary of the report published under the Industrial Property Research
Promotion Project FY2012 entrusted by the Japan Patent Office. IIP is entirely responsible for any errors in
expression or description of the translation. When any ambiguity is found in the English translation, the original
Japanese text shall be prevailing.
●

IIP Bulletin 2013 Vol.22

1 ●non-patentee company, the patent purchase pricecould be minimized under the patent purchasesystem proposed by this research. We have also
found that, when the effect of a patent purchase isevaluated based on the change in social surplus
and the government's payment for the patentpurchase price, if the placement of a patent in the
public domain allows all companies to produce
goods at the same marginal cost, the greater the
non-patentee company's payment for the patentpurchase price is, the greater the effect of thepatent purchase would be.
By investing in R&D activities, companies
can invent new technologies and obtain patents.
We have examined a case where companies are
given an opportunity to make a decision on R&D
investments and have discussed how theirdecision-making process would differ between
the following two scenarios: where a patentpurchase system exists and where such a systemdoes not exist.
We have found that a patent purchase pricewould be minimized under the above-describedpatent purchase system as long as there is only
one non-patentee company. We have also foundthat a patent purchase system would reducesocial inefficiency. Furthermore, we haveexamined whether the same effect can beobtained if two non-patentee companies were toexist. For this purpose, we have altered thepatent purchase system originally designed to be
applied to cases where only one non-patentee
company exists. First, the government would
adopt as the patent purchase price the second
highest estimate from among the reported
estimates of the patent value. Then, if a patent ispurchased, the non-patentee companies would
partially pay the patent purchase price. Even if apatent is not purchased, the non-patentee
companies would make their respective payments
based on the reported estimates of the patentvalue. We have found that the altered patentpurchase system could minimize the patentpurchase price if two non-patentee companies
were to exist. We have also found that, if theplacement of a patent in the public domain allows
all companies to produce goods at the same
marginal cost, the greater the non-patentee
companies' payment for the patent purchase priceis, the greater the effect of the patent purchasewould be.
The structure of this report is as follows.
Chapter II examines the basic model. Chapter III
discusses the action that companies would takeunder the patent purchase system and figures out●

in what cases the patent purchase system could
reduce social inefficiency. As the basic model, we
will discuss a case where one company alreadyowns a patent. Chapter IV analyzes cases wherecompanies
caninventpatentablenewtechnologies by making R&D investments, and it
discusses the influence that the existence of apatent purchase system has on corporate R&D
investment activities. Chapter V re-examines acase where one company already owns a patent.
This chapter also examines a case where two
non-patentee companies exist, discusses how apatent purchase system should be designed, anddetermines in what cases the patent purchasesystem would reduce social inefficiency. Finally,
this chapter points out issues that require further
study.

Ⅱ Basic Model
This chapter examines a case where twocompanies exist. It is assumed that one company
owns a patent and can produce goods, while theother one does not own a patent and cannot
produce goods.
We assume that the government willpurchase a patent and place it in the publicdomain in order to allow the non-patentee
company to produce goods. Since the government
has no information about the value of the patent,
the government has to obtain information on its
value from the non-patentee company anddetermine the patent purchase price based
thereon. More specifically, the government would
adopt as the patent purchase price the estimate
presented in a report on the patent value that the
non-patentee
companysubmits
tothegovernment. Then, the government proposes thepatent purchase price to the patentee company. If
the patentee company accepts the proposal, thegovernment would pay the proposed price andobtain a patent. The non-patentee company would
also partially pay the proposed price. The
purchased patent would then be placed in the
public domain. If the proposal is refused, thepatent would still be owned by the patentee
company, and the non-patentee company would
not make any payments.
If a patent is purchased and placed in the
public domain, the non-patentee company is alsoable to produce goods. In this case, it is assumed
that both companies would engage in Cournot
competition. The price of goods would bedetermined based on the (inverse) linear demand
function. Each company would operate at a2 ●IIP Bulletin 2013 Vol.22

constant marginal cost. It is assumed that the twocompanies would be able to fully know eachother's marginal cost. Under these circumstances,each company engages in profit-maximizing
production.
If a patent is not purchased, only thepatentee company would produce goods. The
price of the goods would be determined based onthe (inverse) linear demand function. The
patentee company would operate at a constantmarginal cost. Under these circumstances, only
thepatenteecompany
engagesinprofit-maximizing production.

Ⅲ Analysis of the Basic Model
This chapter examines the action that eachcompany would take under the patent purchasesystem described in the preceding chapter.
1

Action taken by the patentee company

First, this section examines the action thatthe patentee company would take in response to
the patent purchase price proposed by thegovernment. If the government's proposal isaccepted, the patentee company gains profits inthe market as well as the amount of money
equivalent to the patent purchase price. It should
be noted that, even after the patent is purchased
and placed in the public domain, the patentee
company would be permitted to produce goods.
On the other hand, if the government's proposal
is refused, the patentee company would only gain
profits in the market.
In this case, if the patent purchase priceproposed by the government is larger than thediscrepancy between the estimated profits when
only the patentee company can produce goods
versus the estimated profits when bothcompanies can produce goods, the patentee
company would accept the proposal. If it issmaller, the patentee company would refuse theproposal.
Here we assume that if thegovernment-proposed patent purchase price isequivalent to the abovementioned discrepancy,
the patentee company would accept the proposal.
2

Action taken
companybythenon-patentee

value in consideration of the action that thepatentee company would take in response to thegovernment's proposal.
Consequently, the estimate of the patent
reported by the non-patentee company would be
the same as the discrepancy between theestimated profits when only the patentee
company can produce goods versus the estimatedprofits when both companies can produce goods,
provided that the non-patentee company would
prefer obtaining zero profits in the case where thepatent is purchased rather than obtaining zeroprofits in the case where the patent is notpurchased.
Let's assume that the non-patentee company
reports a slightly higher estimate than theestimate presented in the aforementioned report.
In this case, even if the non-patentee company
were to report a slightly lower estimate, thepatent would be purchased. Furthermore, since
the patent purchase price is lower than thecurrent level, the non-patentee company's
payment would be reduced. In other words, byreporting a slightly lower estimate than thecurrent level, the non-patentee company might beable to increase profits. Therefore, thenon-patentee company would not report an
estimate that is slightly higher than the one
presented in the aforementioned report. Similarly,
let's assume that the non-patentee company
reports an estimate that is lower than theestimate presented in the aforementioned report.
In this case, the patent would not be purchased.
By reporting an estimate that would lead to thepurchase of the patent, the non-patentee company
could
increase
profits.
Therefore,
thenon-patentee company would not report an
estimate that is lower than the one presented in
the aforementioned report.
Theestimate
presented
inthe
aforementioned report would be the lowest patentpurchase price acceptable by the patentee
company. It should be noted that the action of the
non-patentee company is predicted based on theassumption that the non-patentee company's
share of the payment for the patent purchaseprice satisfies certain conditions. Thus, if thisassumption is false, the non-patentee company
would not submit the aforementioned report.
Consequently, the patent would not be purchased.

Next, this section discusses the kind ofreport that the non-patentee company would
submit to the government. The non-patentee
company would report an estimate of the patent

3

●

3 ●

IIP Bulletin 2013 Vol.22

Evaluation
systemThisofsectionthepatentexaminespurchase

whethertheexistence of a patent purchase system could
reduce social inefficiency. In order to evaluate theeffect of the patent purchase system, a formula
has been established by using the change in social
surplus and the government's payment for thepatent purchase price. The term "social surplus"
means desirability by society as a whole. Bymaking a comparison between a social surplus
when a patent has been purchased and a social
surplus when a patent has not been purchased, it
is possible to determine whether the patentpurchase system has reduced social inefficiency.
When a patent is purchased, the government
partially pays the patent purchase price. Thisshould be taken into consideration when making
an evaluation of the effect of a patent purchasesystem.
If the result of the calculation according to
the formula is non-negative, it may be interpreted
that the patent purchase system has reducedsocial inefficiency. Otherwise, it would beinterpreted that the patent purchase system has
not reduced social inefficiency.
If a patent is purchased, both thenon-patentee company and the patentee company
are assumed to be able to produce goods at thesame marginal cost. In this case, a patentpurchase system generates a certain range for theshare of payment for the patent purchase price inwhich social inefficiency would be reduced.

Figure I: Case where only one non-patentee
company exists
In fact, if both the non-patentee company andthe patentee company can produce goods at thesame marginal cost, the change in social surplus
is constantly positive. Therefore, the larger the
non-patentee company's share of the payment forthe patent purchase price is, the more●significantly the existence of a patent purchasesystem would reduce social inefficiency. On theother hand, if the non-patentee company's shareof the payment for the patent purchase pricebecomes excessively large, the company would
consider it more desirable for the patent to not bepurchased so that the non-patentee company is
not permitted to produce goods, rather thanfacing a situation where the patent is purchased
so that the non-patentee company is permitted to
produce goods.

Ⅳ

Relationship with R&D Investment
Activities

By making R&D investments, companies can
successfully invent patentable new technologies.
This chapter discusses the relationship between apatent purchase system and corporate R&D
investment activities.
This chapter examines a case where twocompanies exist (Company A and Company B) as
described in the preceding chapter. It is assumed
that the two companies are engaged in Cournot
competition and are symmetric. In this case, itwould be sufficient to examine either of the twocompanies.
Now, let's assume that Company i produces
goods at a constant marginal cost and that theCompanyAsuccessfully
inventsnewtechnologies at a certain probability by making
R&D investments. It is also assumed that
Company A has successfully invented a newtechnology and can produce goods at a lower
marginal cost than the current level and that,since the new technology is protected by a patent,
Company B cannot use the technology.
Furthermore, it is assumed that, if bothcompanies successfully invent a new technology,
the company entitled to obtain a patent is chosen
at an equal probability.
Let's assume that Company A has
successfully invented a new technology andobtained a patent and that the price of the goods
is determined based on the (inverse) linear
demand function. In this case, Company A canproduce goods at a lower marginal cost than thecurrent level, while Company B produces goods
at the same marginal cost as the current level.
Each company engages in profit-maximizing
production.
Next, let's assume that Company B has
successfully invented a new technology andobtained a patent and that the price of the goods
is determined based on the (inverse) linear
4 ●IIP Bulletin 2013 Vol.22

demand function. In this case, Company A
produces goods at the same marginal cost as thecurrent level, while Company B can produce
goods a lower marginal cost than the current level.
Each company engages in profit-maximizing
production.
Finally, let's assume that neither company
has successfully invented a new technology
regardless of whether or not it has made R&D
investments. It is assumed that the price of thegoods is determined based on the (inverse) linear
demand function. In this case, each company
produces goods at the same marginal cost as thecurrent level and engages in profit-maximizing
production.
1

Case where no patent purchase system
existsThis section examines the action thatcompanies would take in terms of R&D
investments if no patent purchase system exists.
(1) Case where Company B makes R&D
investments
This section discusses the benefits that
Company A could gain if it makes R&D
investments in a case where Company B also
makes R&D investments. If Company A makes
R&D investments, there would be four possible
scenarios: (1) both companies successfully inventa new technology, (2) only Company A
successfully invents a new technology, (3) only
Company B successfully invents a new technology,
and (4) neither company successfully invents a
new technology.
Next, this section discusses the benefits that
Company A could gain by not making R&D
investments. If Company A does not make R&D
investments, there would be two possible
scenarios: (1) only Company B successfully
invents a new technology and (2) neither
company successfully invents a new technology.
(2) Case where Company B does not makeR&D investments
This section discusses the benefits that
Company A could gain if it makes R&D
investments in a case where Company B does notmake R&D investments. If Company A makes
R&D investments, there would be two possible
scenarios: (1) only Company A successfully
invents a new technology and (2) neither
company successfully invents a new technology.
Next, this section discusses the benefits
Company A could gain by not making R&D
investments. If Company A does not make R&D
investments, there would be only one scenario:
neither company successfully invents a newtechnology.
The above-described argument may besummarized by the following table:

Company B makes
investments

Company B does
not make investments

Company A makes
investments

Company A does
not make investments

Table I: Case where no patent purchase system exists●

IIP Bulletin 2013 Vol.22

5 ●By specifying a value for each parameter,
Company A can determine whether it shouldmake R&D investments if Company B makes
R&D investments. Similarly, Company A candetermine whether it should make R&D
investments if Company B does not make R&D
investments.
The same argument may apply to Company
B. Therefore, by using numerical examples, it ispossible to discuss the action that each company
would take in terms of R&D investments if apatent purchase system does not exist.
2

Next, this section discusses the benefits that
Company A could gain by not making R&D
investments. If Company A does not make R&D
investments, there would be two possible
scenarios: (1) only Company B successfully
invents a new technology and (2) neither
company successfully invents a new technology.
(2) Case where Company B does not makeR&D investments
Similarly, this section discusses the benefits
that Company A could gain if it makes R&D
investments in a case where Company B does notmake R&D investments. If Company A makes
R&D investments, there would be two possible
scenarios: (1) only Company A successfully
invents a new technology and (2) neither
company successfully invents a new technology.
Next, this section discusses the benefits that
Company A could gain by not making R&D
investments. If Company A does not make R&D
investments, there would be only one possible
scenario: neither company successfully invents a
new technology.
The above-described argument may besummarized by the following table:

Case where a patent purchase system
existsNext, this section examines the action thateach company would take in terms of R&D
investments if a patent purchase system exists. If
a patent purchase system exists, the government
can purchase a patent from the company that has
invented a new technology so that the othercompany can also use the new technology.
Therefore, let's assume that, if at least one
company successfully invents a new technology,
the government would be able to purchase apatent in the manner described in the preceding
chapter.
Let's assume that Company A successfully
invents a new technology and obtains a patent andthat the value of the goods is determined basedon the (inverse) linear demand function. Company
A would be able to produce goods at a lower
marginal cost than the current level. Since thegovernment purchases the patent, Company B
would also be able to produce goods at a lower
marginal cost than the current level. In this case,each company engages in profit-maximizing
production.
(1) Case where Company B makes R&D
investments
This section discusses the benefits that
Company A could gain if it makes R&D
investments in a case where Company B also
makes R&D investments, while a similar
discussion was held in the preceding section on acase where a patent purchase system does notexist. If Company A makes R&D investments,
there would be four possible scenarios: (1) bothcompanies successfully invent a new technology,(2) only Company A successfully invents a newtechnology, (3) only Company B successfully
invents a new technology, and (4) neither
company successfully invents a new technology.
●

6 ●IIP Bulletin 2013 Vol.22

Company B makes
investments

Company B does
not make investments

Company A makes
investments

Company A does
not make investments

Table II: Case where a patent purchase system exists

By specifying a value for each parameter,
Company A can determine whether it shouldmake R&D investments if Company B makes
R&D investments. Similarly, Company A candetermine whether it should make R&D
investments if Company B does not make R&D
investments.
The same argument may apply to Company
B. Therefore, by using numerical examples, it ispossible to discuss the action that each company
would take in terms of R&D investments if apatent purchase system exists.

Ⅴ Discussion and Conclusion
So far, we have examined a patent purchasesystem on the assumption that only one
non-patentee company exists. If there are two or
more non-patentee companies, would a patentpurchase system reduce social inefficiency? This
chapter discusses a patent purchase system on
the assumption that two non-patentee companies
exist.
Let's assume that there are three companies
and that one patentee company can produce goods,
while the other two non-patentee companies
cannot produce goods.
As in the case where only one non-patentee
company exists, since the government does nothave information on the value of the patent, the●

IIP Bulletin 2013 Vol.22

government has to determine the patent purchaseprice based on the patent-related information
obtained from non-patentee companies. If there
are two non-patentee companies, each of which
reports an estimate of the patent value to thegovernment, the government has to decide which
estimate to adopt as the patent purchase price.
Let's assume that the government uses thesecond highest estimate as the patent purchaseprice and proposes the price to the patentee
company. If the patentee company accepts the
proposal, the government would pay the price andobtain the patent. Since there are two
non-patentee companies, the government has todetermine which company should partially pay
the proposed price. It is assumed that bothcompanies would partially pay the proposed price.
The patent purchase by the government would beplaced in the public domain. If the government's
proposal is refused, the patent would still beowned by the patentee company. In this case,the company that reported the highest estimate isrequired to pay the amount equivalent to thesecond highest estimate, while the company thatreported the second-highest estimate is required
to pay the amount equivalent to its own estimate.
If a patent is purchased and placed in the
public domain, the non-patentee companies canalso produce goods. In this case, it is assumed
that the three companies would engage in
7 ●Cournot competition and that the price of goods
would be determined based on the (inverse)
linear demand function. It is also assumed thateach company produces goods at a constantmarginal cost and that each company would be
able to fully know each other's marginal cost.
Under these circumstances, each company
engages in profit-maximizing production.
If a patent is not purchased, only thepatentee company would produce goods. The
price of the goods would be determined based onthe (inverse) linear demand function. The
patentee company produces goods at a constantmarginal cost. Under these circumstances, thepatentee company engages in production that will
maximize profits.
1companies.
The non-patentee company would report an
estimate of the patent value in consideration of
the action that the patentee company would takein response to the government's proposal.
Consequently, the estimate of the patent reportedby the non-patentee company would be the sameas the discrepancy between the estimated profits
when only the patentee company can produce
goods and the estimated profits when eachcompany can produce goods, provided, however,that the non-patentee company would preferobtaining zero profits when the patent ispurchased rather than obtaining zero profits when
the patent is not purchased.
Let's assume that the non-patentee company
reports a slightly higher estimate than the one
presented in the aforementioned report. In thiscase, even if the non-patentee company reports aslightly lower estimate, the patent would bepurchased. Furthermore, the non-patentee
company's payment for the patent purchase pricewould become lower than the current level. In
other words, by reporting a slightly lower
estimate than the current level, the non-patentee
company could increase profits. Therefore,
neither non-patentee company would report an
estimate that is slightly higher than the one
presented in the aforementioned report.
Next, let's assume that a non-patentee
company reports an estimate that is lower thanthe one presented in the aforementioned report.
In this case, even if an estimate that is slightly
lower than the current level is reported, thepatent would not be purchased. However, a
non-patentee company's payment for the patentpurchase price would become smaller than thecurrent level because a non-patentee company isrequired to pay the government the amountequivalent to its own estimate. By reporting an
estimate that is slightly lower than the current
level, the non-patentee company could increase
profits. Therefore, the non-patentee company
would not report an estimate that is lower thanthe one presented in the aforementioned report.
Finally, let's assume that a non-patentee
company is the one that submits theaforementioned report. In this case, even if a
non-patentee company submits an estimate thatis slightly lower than the current level, thegovernment would adopt as the patent purchaseprice the estimate reported by the othernon-patentee
company.
Therefore,
thenon-patentee company's currently-consideredpayment for the patent purchase price would

Action taken by the patentee company

First, this section examines the action thatthe patentee company would take in response to
the patent purchase price proposed by thegovernment. If the government's proposal isaccepted, the patentee company gains profits inthe market as well as the amount of money
equivalent to the patent purchase price. It should
be noted that, even after the patent is purchased
and placed in the public domain, the patentee
company would be permitted to produce goods.
On the other hand, if the government's proposal isrefused, the patentee company would only gain
profits in the market.
In this case, if the patent purchase priceproposed by the government is larger than thediscrepancy between the estimated profits when
only the patentee company can produce goods andthe estimated profits when each company can
produce goods, the patentee company would
accept the proposal. If it is smaller, the patentee
company would refuse the proposal. Here weassume that if the government-proposed patentpurchaseprice
isequivalent
totheabovementioned discrepancy, the patentee
company would accept the proposal.
2

Action taken
companiesbythenon-patentee

Next, this section discusses the kinds ofreports that the non-patentee companies would
submit to the government. It is assumed that the
non-patentee companies are symmetric and thatthe non-patentee companies report the same
estimate. In this case, it would be sufficient toexamine either of the two non-patentee●

8 ●IIP Bulletin 2013 Vol.22

remain the same as the current level. Meanwhile,
if a non-patentee company reports an estimatethat is slightly lower than the current level, thegovernment would adopt as the patent purchaseprice the currently-considered estimate reportedby the non-patentee company, the patent would
not be purchased. In sum, a non-patentee
company would obtain zero profits by reporting an
estimate that is slightly lower than the current
level. Therefore, neither non-patentee company
reports an estimate that is lower than the current
level.
The
estimate
presented
inthe
aforementioned report would be the lowest patentpurchase price acceptable by the patentee
company. It should be noted that the action of the
non-patentee company is predicted based on theassumption that the non-patentee company's
share of the payment for the patent purchaseprice satisfies certain conditions. Thus, if thisassumption is false, the non-patentee company
would not submit the aforementioned report.
Consequently, the patent would not be purchased.
3

Evaluation
systemofthepatentshare of payment for the patent purchase price inwhich social inefficiency would be reduced.

Figure II: Case where two non-patentee
companies exist
In fact, if both the non-patentee company andthe patentee company are able to produce goods
at the same marginal cost, the change in social
surplus is constantly positive. Therefore, thelarger the non-patentee company's share of thepayment for the patent purchase price is, themore significantly the existence of a patentpurchase system would reduce social inefficiency.
On the other hand, if the non-patentee company's
share of the payment for the patent purchasepricebecomes
excessively
large,
thenon-patentee company would consider it moredesirable if the patent is not purchased so that thecompany is not permitted to produce goods,
rather than facing a situation where the patent ispurchased so that the non-patentee company ispermitted to produce goods.
This research has proposed a new system,
i.e., a patent purchase system, and examined
whether the use of a patent purchase system forthe purpose of complementing the existing patent
system could reduce the social inefficiency causedby the existing patent system. We have found that,in a case where two companies exist, i.e., one
patentee company and one non-patentee company,
the patent purchase price could be minimized if
the government were to have the non-patentee
company submit information on the patent anddetermine the patent purchase price based
thereon, and were to have the non-patentee
company partially pay the patent purchase price.
This research has evaluated the effect of apatent purchase system in consideration of thegovernment's payment for the patent purchaseprice and the change in social surplus between

purchase

As discussed in the preceding section in acase where only one non-patentee company
exists, this section examines whether the
existence of a patent purchase system could
reduce social inefficiency. In order to evaluate theeffect of the patent purchase system, a formula
has been established by using the change in social
surplus and the government's payment for thepatent purchase price. By making a comparison
between a social surplus in a case where a patenthas been purchased and a social surplus in a casewhere a patent has not been purchased, it ispossible to determine whether the patentpurchase system has reduced social inefficiency.
It should be noted that, when a patent ispurchased, each non-patentee company partiallypays the patent purchase price.
If the result of the calculation according to
the formula is non-negative, it may be interpreted
that the patent purchase system has reducedsocial inefficiency. Otherwise, it would beinterpreted that the patent purchase system has
not reduced social inefficiency.
If a patent is purchased, both thenon-patentee company and the patentee company
are assumed to be able to produce goods at thesame marginal cost. In this case, a patentpurchase system generates a certain range for the●

IIP Bulletin 2013 Vol.22

9 ●the two cases, i.e., the case where a patent ispurchased and the case where a patent is notpurchased. We have found that, in the case wherea patent is purchased, if all the companies can
produce goods at the same marginal cost, thegreater the non-patentee company' share of thepayment for the patent purchase price is, themore significantly the patent purchase system
would reduce social inefficiency. This indicates
not only that the non-patentee company's
production of goods would promote competition
and improve social surplus but also that the
government's payment for the patent purchaseprice would be reduced. The same effects could
be gained if two non-patentee companies existed
but if the methods of determining and sharing thepatent purchase price were altered.
However, it should be noted that the
aforementioned findings were made on theassumption that the non-patentee companies can
produce goods at such marginal cost that is atleast the same as the patentee company's
marginal cost. It is widely known that, if themarginal cost of non-patentee companies isexcessively high, the change in social surplus
would be negative. In other words, the existenceof a patent purchase system would not reducesocial inefficiency. Therefore, it would benecessary to devise a patent purchase systemthat would allow non-patentee companies to
produce goods only if the change in social surplus
is positive.
Reference
Kremer, M. (1998):“Patent buyouts: A mechanism
for
encouraging
innovation.”Quarterly
Journal of Economics 113: 1137-1167.

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10 ●IIP Bulletin 2013 Vol.22