Progress 09/01/11 to 08/31/14
Outputs
Target Audience: Our research included six objectives. The primary objective of our research was to determine the optimal fee structure for a university technology transfer office (TTO) involved in licensing university-based patents in new agricultural products. The six specific objectives included the following: to develop a theoretical model of optimal licensing fee-structure that determines the preferred mix of royalties, both per-unit and ad valorem, and up-front fees that maximizes revenue to the university, and the productivity of the researchers themselves, in an environment of uncertainty regarding the value of the innovation, and asymmetric information between the innovator and licensees; to design and conduct an incentive-compatible economic experiment in order to collect primary data on the relative desirability of fees versus royalties (or neither) under conditions of uncertainty and asymmetric information in the licensing of a product-innovation; to estimate an econometric model of the willingness to pay for patent licenses under each pricing and information treatment used in the experimental auction; to simulate equilibrium cash flows to a hypothetical innovation derived in the theoretical model using realistic parameter values from products recently developed in the horticultural sector in order to compare negotiated license values to those suggested by the theoretically optimal solution; to use the optimal price-paths generated by the theoretical model to estimate optimal patent values using a real-option valuation model that recognizes the inherent endogeneity of prices for new agricultural products; to use the results of our theoretical and empirical analysis to recommend licensing strategies to university TTO employees, university administrators and researchers. We will also communicate these strategies to agents on the other side of the agricultural-innovation market – the grower groups and associations that bid for new-product licenses. The results presented in the four manuscripts allowed us to meet the first five objectives and to begin to present results across a broader set of issues and stakeholders as part of the sixth objective. We have also made progress disseminating our research results to a wide audience including TTO employees, agricultural producer groups, and scientific researchers. We plan to continue to disseminate our results in the near future and to showcase how this is an important and interesting problem for agricultural economists to study. As one example of this, PI Rickard has joined a team at WSU that has received some internal funding from WSU to examine the economics of licensing patented apple varieties to growers in Washington State. PI Rickard will be working with researchers from WSU at the WA Hort Show in December 2014 to study this question with focus groups of apple growers. Changes/Problems:
Nothing Reported
What opportunities for training and professional development has the project provided? Each PI worked with Ph.D. students, and each PI has (or is in the process) of presenting research results and publishing papers. How have the results been disseminated to communities of interest? The research has been presented to a wide range of industry and academic audiences. Below is a list of outlets where the applied research has been disseminated. Rickard, B.J. “University licensing of patents for varietal innovations in agriculture.” School of Economics and Management, Free University of Bozen-Bolzano, Bolzano, Italy. November 19, 2014. Rickard, B.J. “University licensing of patents for varietal innovations in agriculture.” Grenoble Applied Economics Laboratory (a joint laboratory of INRA and of the University Pierre Mendès-France), Grenoble, France. June 6, 2014. Rickard, B.J. “University licensing of patents for varietal innovations in agriculture.” Department of Food, Agricultural, and Resource Economics, University of Guelph. May 20, 2014. Rickard, B.J. “University licensing of patents for varietal innovations in agriculture.” Department of Agricultural Economics, Oklahoma State University. Stillwater, OK. November 22, 2013. Rickard, Bradley, Tim Richards, and Jubo Yan. 2013. “University licensing of patents for varietal innovations in agriculture.” Presented at the AAEA/CAES Annual Meeting. Washington D.C. August 7, 2013. Richards, T.J., and B.J. Rickard. 2013. “Patents as options: Path-dependency and optimal valuation strategies.” Presented at the AAEA/CAES Annual Meeting. Washington D.C. August 6, 2013. Rickard, Bradley, Tim Richards, and Jubo Yan. 2013. “University licensing of patents for varietal innovations in agriculture.” Presented at the NAREA Annual Meeting. Ithaca, NY. June 24, 2013. Rickard, B.J., T.J. Richards, and J. Yan. 2013. “Fees versus royalties: University revenues from licensing varietal innovations.” Presented at the Annual Meeting of NC-1034, Impact Analyses and Decision Strategies for Agricultural Research. Tucson, AZ. March 15, 2013. What do you plan to do during the next reporting period to accomplish the goals?
Nothing Reported
Impacts
What was accomplished under these goals?
A summary of the manuscripts The first manuscript titled “Optimal Licensing of Agricultural Patents: Fees versus Royalties” written by Fang (a graduate student at ASU), Richards, and Rickard presents a theoretical model of the optimal choice of fees versus royalties for a university technology transfer office (TTO) interested in marketing university-based research to the private sector. The work in this paper directly addresses objective 1. In this paper we find that non-exclusive licensing performs better than exclusive licensing under both fixed fees and royalties, and that the preferred contract consists of fixed-fees only. We also find that the innovator's license revenue depends on the magnitude of the innovation so there is a greater reward to the innovator's institution if the innovation is large. This manuscript is forthcoming in the Journal of Agricultural and Resource Economics. The second manuscript, titled “University licensing of an agricultural patent” written by Rickard, Richards, and Yan (a graduate student at Cornell) directly addresses objectives 2 and 3. In this paper we develop an experiment to examine the revenue stream to universities from licensing plant-based innovations. In the experiment we asked subjects to bid for access for a patented input that would be used to produce a differentiated product; treatments were employed to solicit bids that were financed by fees, royalties, and a combination of the two mechanisms under exclusive and non-exclusive contracts. The literature studying the economics of downstream duopoly competition in quantity suggests that revenues for the innovator would be greatest under a non-exclusive contract that uses fees and royalties. In our experiment we allow more than two firms to obtain access to the patent in the non-exclusive treatments, and our empirical results suggest that innovator revenues are greatest when royalties are used alone in a non-exclusive contract. This manuscript is being revised for resubmission to Agricultural Economics. The third manuscript titled “Patents as options: Path-dependency and patent value” written by Richards and Rickard addresses objectives 4 and 5. Here we use the insights developed in the theory paper (the first manuscript described above) to create an optimal pricing model, wherein we assume a patent is isomorphic to a real option on an asset with uncertain returns. We find that accounting for path-dependency in license revenue streams generates prices that more nearly approximate observed patent prices. While non-path dependent prices yield conventional sensitivities to volatility, mean-reversion and returns-growth, path-dependent prices show highly non-linear comparative statics. These results are important both for patent licensees, and for licensors seeking to maximize license revenue. The manuscript was published in the December 2014 issue of the European Review of Agricultural Economics. The fourth manuscript (written by Julian Alston and a graduate student at UC Davis) provides an analysis that builds on the three manuscripts described above, and also goes further to assess how various licensing schemes affect not only the innovator, but also producers and consumers. In this sense, this manuscript contributes in a meaningful way to objective 6. The work done by researchers at UC Davis considers the choicefaced by a public university when licensing a plant variety patent, with a focus on apples. This workdiffers from the majority of past studies on patent licensing because we allow licensees to determinethe signal of product quality through a trademark and we consider welfare objectives for a publicuniversity that differ from the simple maximization of patent income. In this context, we comparemonopoly licensing and two oligopoly licensing scenarios -- in which the oligopolists do or do not cooperate in optimizing expenditure on signaling quality through the trademark. We then solve for the optimal choiceof licensing fees for the university.We explore these relationships in general terms and in numerical simulations conducted under a range of plausible assumptions for parameter values, consistent with the economics of the apple industry.Using numerical simulations, we find that consumer surplusand social welfare may be higher under exclusive licensing, particularly if consumers are relativelyresponsive to investment in the trademark but relatively insensitive to price. However, exclusivelicenses may create distributional concerns among producers. Furthermore, different objective functions of the university can imply different optimal outcomes for both the number of licensees andthe licensing fees. This work is reported in a paper by Zoe Plakias and Julian Alston titled "Optimal Licensing for Public Intellectual Property:Theory and Application to Plant Variety Patents," which is undergoing final revisions prior to submission to an academic journal for review for possible publication. Although we focus on apples, the model and its results could apply in a varietyof settings.
Publications
- Type:
Journal Articles
Status:
Published
Year Published:
2014
Citation:
Richards, T.J., and B.J. Rickard. 2014. Patents as options: Path-dependency and optimal valuation strategies. European Review of Agricultural Economics 41(5): 817841.
- Type:
Journal Articles
Status:
Accepted
Year Published:
2015
Citation:
Fang, D., T.J. Richards, and B.J. Rickard. Optimal licensing of agricultural patents: Fees versus royalties. Journal of Agricultural and Resource Economics (forthcoming in January 2015 issue).
- Type:
Journal Articles
Status:
Under Review
Year Published:
2013
Citation:
Rickard, B.J., T.J. Richards, and J. Yan. University licensing of patents for varietal innovations in agriculture. AEM Working Paper No. 2013-19. Revisions requested at Agricultural Economics.
- Type:
Conference Papers and Presentations
Status:
Other
Year Published:
2014
Citation:
Optimal Licensing for Public Intellectual Property: Theory and Application to Plant Variety Patents, Alston, Julian
Plakias, Zoe T., http://purl.umn.edu/170649.
Agricultural and Applied Economics Association>2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota
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Progress 09/01/12 to 08/31/13
Outputs
Target Audience: The target audience for this research includes agricultural producers, technology transfer offices at universities, policy makers, faculty members in plant breeding units, and other interesteduniversity administrators. We have beenparticularly interested in sharing our results with fruitproducers that are considering adopting licensed varieties being offered by various land grant universities. Changes/Problems:
Nothing Reported
What opportunities for training and professional development has the project provided?
Nothing Reported
How have the results been disseminated to communities of interest? As a first step, I have begun to disseminate the results to colleagues at professional meetings. I was also recently asked to present this research at a departmental seminar at Oklahoma State University. That audience included agricultural economists plus folks form their technology transfer offices thatare interested in the licensing structure for wheat varieties released by OSU. Rickard, Bradley. “University licensing of patents for varietal innovations in agriculture.” Presented as a departmental seminar at Oklahoma State University. Stillwater, OK. November 22, 2013. 40 attendees. Rickard, Bradley. “University licensing of patents for varietal innovations in agriculture.” Presented at the AAEA/CAES Annual Meeting. Washington D.C. August 6, 2013. 15 attendees. What do you plan to do during the next reporting period to accomplish the goals? We plan to finish the papers that we have started and see them through to publication in 2014. We also plan to work more closely with our colleague at UC Davis to help them complete a project they have started that examines the welfare implications (for consumers, producers, and the innovators/universities) of the various licensing arrangements.
Impacts
What was accomplished under these goals?
We have three main accomplishments to report for this period. Each relates to a separate objective in the project, and each is summarized in manuscripts that are under review or forthcoming. The first manuscript examines pricing models for patented licenses using a option valuation-type framework. The title for this work is "Patents as Options: Path-Dependency and Patent Value". Despite the growing importance of license revenue to cash-strapped land-grant universities, there has been no formal attempt to develop pricing models for patent licenses. We recognize that patents are options on the stream of future revenues, and apply option-valuation techniques to determine license prices. We find that accounting for path-dependency in license revenue streams generates prices that more nearly approximate observed patent prices. While non-path dependent prices yield conventional sensitivities to volatility, mean-reversion and returns-growth, path-dependent prices show highly non-linear comparative statics. These results are important both for patent licensees, and for licensors seeking to maximize license revenue. The second manuscript is a mostly theoretical piece that examines the economic tradeoffs between the use of fees and royalties to license varietal innovations. The title for this work is "Optimal Licensing of Agricultural Patents: Fees versus Royalties".Universities are critically important in generating commercially-relevant research. Lach and Schankerman (2008) report that universities conduct 53% of all basic research and that "...the number of U.S. patents awarded to university inventors annually increased from 500 in 1982 to 3255 in 2006. " Technology transfer offices (TTOs) serve as liaisons between researchers and private-sector firms, helping to transfer profit from new innovations to the researchers and their institutions. The economic problem facing TTOs, therefore, is how to design licensing strategies to maximize the return to university-generated research? New institutional arrangements have arisen for the transfer of new plant technology from research universities to growers willing to pay for new varieties. Pricing mechanisms in these markets to date, however, have been inefficient and not conducive to the rapid growth of research and development in new fruit and vegetable varieties. Pricing schemes that fail to provide sufficient incentives to either the researchers or the firms provide constraints to the process of technology transfer. In this paper, we study the optimal design of a patent-license pricing scheme for an agricultural product innovation. The third manuscript centers on someapplied research that we conducted in a laboratory to assess subjects' willingness to pay for licenses to patented inputs. We use the experimental data to estimate the likely returns to an innovator/licensor under various licensing schemes. The title for this work is "University Licensing of Patents for Varietal Innovations in Agriculture". There has been a sharp increase in the number of patented agricultural products from public universities in the United States. We develop an experiment to examine the revenue stream to universities from licensing plant-based innovations. In the experiment we asked subjects to bid for access for a patented input that would be used to manufacture a differentiated product; treatments were employed to solicit bids that were financed by fees, royalties, and a combination of the two mechanisms under exclusive and non-exclusive contracts. The literature studying the economics of downstream duopoly competition in quantity suggests that revenues for the innovator would be greatest under a non-exclusive contract that uses fees and royalties. In our experiment we allow more than two firms to obtain access to the patent in the non-exclusive treatments, and our empirical results suggest that innovator revenues are greatest when royalties are used alone in a non-exclusive contract.
Publications
- Type:
Journal Articles
Status:
Awaiting Publication
Year Published:
2014
Citation:
D. Fang, T.J. Richards, and B.J. Rickard. Optimal Licensing of Agricultural Patents: Fees versus Royalties. Revised and resubmitted to the Journal of Agricultural and Resource Economics.
- Type:
Journal Articles
Status:
Awaiting Publication
Year Published:
2014
Citation:
Richards, T.J., and B.J. Rickard. Patents as options: Path-dependency and optimal valuation strategies. Revised and resubmitted to the European Review of Agricultural Economics.
- Type:
Journal Articles
Status:
Under Review
Year Published:
2013
Citation:
Rickard, B.J., T.J. Richards, and J. Yan. University licensing of patents for varietal innovations in agriculture. AEM Working paper No. 2013-19. Under review at Research Policy.
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Progress 09/01/11 to 08/31/12
Outputs
OUTPUTS: Outputs are defined as activities, events, services, and products that reach people. During this reporting period our team designed and conducted an incentive-compatible economic experiment in a laboratory with human subjects. We collected primary data on the relative desirability of fees versus royalties (or some combination) under conditions of exclusivity and price uncertainty. The purpose of the economic experiment is to examine the equilibrium value of licenses for patented fruit varieties. In addition to the value of the license, we are also interested in learning how important the nature of the payment for the license is for fruit growers. To shed some light on this issue, we ran an experiment that elicited willingness to pay information among subjects for licenses on a patented product under five licensing arrangements: (1) a fixed fee, (2) a per-unit royalty, and a (3) combination of a fixed fee and a per-unit royalty. The combination licensing arrangements required a two-part bid. The treatments in the experiment also examined the impact of price uncertainty and contract exclusivity. Our experiment asked subejcts to submit bids on licenses for a new patented product. We used six treatments that encompass two levels of exclusivity and three levels of payment for the license. Each treatment included two sessions of 20 subjects. At the beginning of each session we provide some background information about the industry and about the potential role for the new patented product. In addition, prior to the first auction for a license, we walked subjects through three practice rounds (for a license on a fictitious new technology) so that they become familiar with the auction mechanism. Each round, the demand for the license was combined with randomly-drawn returns to the underlying innovation, and profits (or losses) were distributed. Profits for the new patented product were a function of its price and quantity produced, as well as the amount that subjects paid for the license. Each round of the experiment gave subjects the opportunity to generate additional profits (or losses). At the completion of each session, we asked participants to complete a computerized survey to collect socio-demographic information (including age, income, and education) and measures that attempted to capture their overall risk-return preferences. Bidders submitted their bids using a BDM auction mechanism. Each auction offered licenses to subjects. Our proposed auctions will follow earlier auction programs used in our lab, and were programmed using Excel spreadsheets and Access databases with Visual Basic for Applications. No services were completed during this reporting period. We now have a dataset from this experiment consucted during the summer of 2012 that we are now using in our analysis. Limited dissemination has occured so far, but we have begun to discuss our experiment and preliminary findings with various individuals in the Plant Breeding Department, the Technology Transfer Office at Cornell, and with apple growers in NYS. PARTICIPANTS: During this period we hired a graduate student at ASU for the 2011-12 AY and employed two graduate students at Cornell during the summer of 2012. TARGET AUDIENCES: Our primary target audiences include university technology transfer offices and growers of tree fruit considering adoption of university-created fruit varieties that are governed by a patent. We have been engaged with both of these groups in an ad hoc way during this reporting period, and plan to share our results wiht both groups more formally during 2013. We expect that our results will provide them with additional information to help them price upcoming "managed" fruit varieties released by public universities in the United States. PROJECT MODIFICATIONS: We had hoped to be able to acquire data from AUTM to examine the historical use of patents for agricultural innovations form public universities in the United States; however, it appears that detailed data are not available in this arena.
Impacts
Co-PI Tim Richards and I have completed research that examines patents as Options; we explore both path-dependency and optimal valuation strategies as part of this research. We recognize that patents are options on the stream of future revenues, and apply option-valuation techniques to determine optimal pricing strategies for university technology officers. We find that path-dependency in license revenue streams creates significant differences in the optimal pricing strategy relative to more standard risk-neutral pricing models, but that path-dependent pricing more nearly approximates observed patent prices. While non-path dependent prices yield conventional sensitivities to volatility, mean-reversion and returns-growth, path-dependent prices show highly non-linear comparative statics. These results are important both for patent licensees and for licensors seeking to maximize license revenue. Preliminary results using data from our experiment carefully document the question of fees versus royalties in the pricing of agricultural innovations. Here we are interested in optimal licensing contracts for patented fruit varieties. We consider the profit implications for both producers and the university (the innovator), but we place special consideration on the effects for returns to the innovator. Theoretical models suggest that a fee-royalty combination would maximize returns to the innovator. We developed an experiment that asked subjects to bid for access to a differentiated patented product; different treatments were used to solicit bids that were financed by fees, royalties, and a combination of the two mechanisms. Our empirical results and subsequent simulations suggest that innovator profits are maximized when royalties are used; these results are most notable with non-exclusive contracts and when the patented product replaces a relatively small share of total production. Both of these outcomes are contributing towards the outcome for our research, and contribute towards the expected impact that our research will have for stakeholders responsible for pricing university-generated innovations. We think that conditions surrounding innovations in horticultural markets are different from those in program crop markets given the perennial nature of fruit crops, the long lag between planting decisions and revenue, and because of the diversity of varieties employed by fruit producers (some varieties may be patented varieties, yet the lion's share are expected to remain as non-patented varieties in the next 20 years).Our primary interest lies in understanding the revenues to a university from patented horticultural varieties, and how the design of a contract between the university and growers will impact that level of revenue. Both of the projects described above shed new light on these issues, and combined with the research we have planned in 2013, will help answer the crucial questions.
Publications
- Richards TJ, Rickard BJ, Alston JM, Feng D. 2012. Patents as Options: Path-Dependency and Optimal Valuation Strategies. Working paper.
- Rickard BJ, Richards TJ, J. Yan, JM Alston. 2012. Fees versus royalties: Optimal licensing contracts for patented fruit varieties. Working Paper.
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