Inventions, the Structure of the Market and Ownership Changes

We consider situations in which many inventors (sellers) and product market firms (sellers) trade on inventions.We first consider the product market firm’s decision to invest in its own R&D. We show that public financing which encourages the inventor’s entry reduces the producer’s own R&D and thus shifts it toward a more specialized conduct in which the inventions are purchased in the outside market. However, with an increase in the number of product market firms both the number of independent inventors and product market firm’s own R&D tend to increase. This shows that the firms do not tend to specialize and give up their own R&D with the natural growth of industries. In the second section of this study we focus on the form of trading mechanism which either the product market firm or the inventing firm chooses. In the trade considered the number of potential buyers and sellers determines, however, the actual price (and thus each party’s shares of the total value of a commercialized invention). The alternative modes of the trading mechanism are either to sell an invention at fixed price or to agree on the arrangement in which the inventor is made a stockholder in the buyer’s firm. We assume that in some degree the inventing firm’s effort are also required in commercialisation after the trade. Owing to the imperfectness of information, explicit contractual mechanisms are assumed to be excluded. The post-trade commercialization efforts make such an arrangement attractive in which the inventor is encouraged to exert post-trade effort by making the inventor an owner in the product market firm. In the trading mechanism considered there also arises a tendency to enforce the opponent’s incentives to exert a post-trade effort. The product market firm would thus be more eager than the inventor to make a payment in the form of its own stocks rather than of pure money. We also show that the decision concerning the mode of agreement (the means of payment) should typically be allocated to that party who is relatively inefficient in raising the total value of an invention in the context of commercialization.