13 Jan 2012  Working Papers

Intermediaries for the IP Market

Executive Summary — Some assets are traded in liquid markets with the help of many, thriving intermediaries: houses and apartments, financial products, books, DVDs, electronics and all sorts of collectibles. Intellectual property (IP) in general, and patents in particular, are not among those assets. In fact, one could argue that the market for patents is one of the last large and inefficient markets in the economy. IP is the ultimate intangible asset and extremely hard to value. Moreover, there are high search and transaction costs on both sides of the market, and the risk of litigation makes all potential participants even more cautious. Despite these difficulties, there could be attractive opportunities to create intermediation mechanisms to match patent creators with patent users and facilitate transactions between them. In recent years, a variety of novel intermediaries has emerged, all using different business models while attempting to bring more liquidity to the patent market. In this paper, Andrei Hagiu and David Yoffie explore the fundamental economic issues responsible for the low liquidity in the market for patents and provide a brief overview of patent intermediaries. They next focus on platform-type intermediaries (i.e., who enable search and transactions without ever taking possession of IP assets) and discuss the reasons for their lack of traction to date. The authors then turn to merchant-like intermediaries and the factors that have made them comparably more successful and influential than platforms. Finally, they discuss efficiency questions raised by patent intermediaries. Key concepts include:

  • Platform-type IP intermediaries have failed to achieve meaningful scale. In contrast, some of the merchant-type IP intermediaries have become quite influential and profitable.
  • The question remains whether merchant-type IP intermediaries have created any meaningful, market-wide efficiencies, as opposed to having simply thrived by exploiting existing inefficiencies and imposing a tax.
  • The perspective of end-consumers is important. Because of litigation, merchant-type IP intermediaries would seem to be at least partly responsible for the current "patent bubble," which arguably leads to higher consumer prices.

 

Author Abstract

During the past decade, a variety of intermediaries have emerged to facilitate the trading of patents: brokers, non-practicing entities (NPEs), defensive aggregators, online platforms, auctions and unique entities such as Intellectual Ventures. We discuss the fundamental causes for the lack of liquidity in the IP market and analyze the merits and shortcomings of the various business models used by patent intermediaries. A key conclusion is that platform-type intermediaries (who facilitate transactions without taking possession of assets) have struggled, whereas merchant-type intermediaries (who acquire patents and seek to monetize them directly) have reached significant scale and influence in the technology industries that fall under the incidence of their assets. We also discuss some efficiency issues raised by the growing prominence of patent merchants.

Paper Information