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Is there a market for ideas?
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by
Joshua S. Gans and Scott Stern
First Draft: 15
th
September 2008This Version: 26
th
January 2009
This paper draws on recent work in market design to evaluate the conditions under which a market for ideas or technology (MfTs) will emerge and operate in an efficient way.While most research on MfT have focused primarily on bilateral exchanges, market design principles suggest that any single transaction takes place in the shadow or all other  potential transactions. As highlighted by Roth (2007), effective market design must ensurefour basic principles: market thickness, lack of congestion, market safety, and avoidance of “repugnance.” Taken together, these conditions ensure that participants in a market haveopportunities to trade with a wide range of potential transactors (market thickness), that themarket is rapid enough (relative to the speed of transactions) that market participants canfeasibly turn down offers in order to seek better matches (lack of congestion), potentialmarket participants have a high incentive to participate in the market and avoid strategicinteraction which might undermine allocative efficiency and social welfare (market safety),and that market trade is not undermined by other social values which limit the ability tocharge positive prices for a good (avoidance of repugnance). This paper provides a criticalexamination of these criteria for MfT. Our analysis suggests that microeconomic, strategic,and institutional factors likely inhibit the allocative efficiency of MfT in mostcircumstances. For example, Arrow’s disclosure problem suggests that the value of a givenidea to any one buyer may be decreasing in the number of other potential buyers who have been able to evaluate the idea (due to information leakages in the valuation process). As aresult, a key property of ideas - the potential for expropriation - limits the potential for market thickness and lack of congestion identified by Roth. At the same time, keyinstitutional developments such as the development of formalized IP exchanges andincreased attention on how to design the patent system to facilitate technology transfer suggest that effective market design may be possible for some innovation markets. Perhapsmost intriguingly, our analysis suggests that markets for ideas are beset by the“repugnance” problem: from the perspective of market design, Open Science is aninstitution that places normative value on “free” disclosure and so undermines the ability of ideas producers to earn market-based returns for producing even very valuable “pure”knowledge.
 Journal of Economic Literature
Classification Number: O31.
 Keywords
. ideas market, intellectual property, market design, repugnance, appropriation.
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We thank Ashish Arora, Alfonso Gambardella, Carl Shapiro, Harold Demsetz and participants at the MadridMarkets for Technology and Industrial Evolution Conference, the FTC Microeconomics Conference for helpfulcomments and the Australian Research Council for financial assistance. Responsibility for all errors lies with theauthors. Correspondence to:J.Gans@unimelb.edu.au. The latest version of this paper is available atwww.mbs.edu/jgans.
 
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Introduction
Markets have the potential to generate high social returns by enhancing allocative efficiency.Though the virtues of markets are easy to idealize (and overstate), it is nonetheless true that market- based exchanges play an important role in facilitating voluntary trade across many areas of theeconomy, from traditional commodities markets to modern developments such as eBay. At least in principle, the potential value arising from voluntary trade through organized markets also exists for ideas or technology. Individual ideas may be valuable to many users and may be productivelyemployed in applications or contexts far removed from the locus of the idea’s generation or invention.When the value of an idea can only be realized by “matching” that idea with key complementaryassets (Teece, 1986), markets that facilitate matching and efficient distribution in a timely fashion will provide significant social returns.It is thus something of a puzzle that markets for ideas are relatively uncommon. While thereare transactional exchanges in both ideas and technologies, and the rate of “ideas trading” seems to beincreasing over time (Arora, Fosfuri, and Gambardella (hereafter, AFG), 2001), it is still very rare for ideas or technologies to be traded in what economists would traditionally refer to as an organizedmarket. Instead, most exchanges of abstract knowledge or prototype technology occur under conditions that are best described as a bilateral monopoly: the buyer and seller engage in negotiationswith limited outside options in terms of alternative exchanges. Buyers (sellers) are unable to play potential sellers (buyers) off against one another, limiting the potential for competitive discipline, andeven successful negotiations vary widely in terms of the price and terms over which knowledge istransferred. As Mark Lemley and Nathan Myrvhold note, “Patents … exist in ... a blind market. Wantto know if you are getting a good deal on a patent license or technology acquisition? Too bad.”(Lemley and Myrvhold, 2008; see also Troy and Werle, 2008) Not simply a matter of how the rentsfrom a given idea are distributed between buyer and seller, the lack of transparent price signals resultsin distorted and inconsistent incentives to produce and commercialize new ideas.Is there a market for ideas? We address this question by combining insights from two prior 
 
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literatures – the
market design
literature and the
markets for technology
literature – which, by andlarge, have mostly developed independently of one another. On the one hand, the market designliterature utilizes formal game-theoretic approaches, most notably from mechanism design, toevaluate how the rules that govern exchange and allocation impact the efficiency of alternative marketinstitutions (Myerson, 2008; Roth, 2002, 2008). Over the past two decades, the insights from marketdesign have been applied in a diverse set of real-world application, from auctions for telecommunications spectrum to exchanges for kidney donation. Our analysis builds directly on therecent synthesis of this literature by Al Roth. Roth (2008) draws on the emerging body of empiricalevidence from real-world market design applications to offer a framework and conditions upon whichmarket designers can evaluate the effectiveness of their prescriptions. Specifically, Roth highlightsthree cross-cutting features of markets that seem to be associated with efficient market-levelexchanges: market thickness (both buyers and sellers have opportunities for trade with a wide rangeof potential transactors), lack of congestion (the speed of transactions is rapid enough to ensuremarket clearing but slow enough so that individuals have the opportunity to seek alternatives whenconsidering an offer), and market safety (agents do not have incentives for misrepresentation or strategic action that undermines the ability of others to evaluate potential trades). In other words, Rothsuggests that the ability to achieve efficiency in real-world markets depends on participation by asufficient number (and diversity) of buyers and sellers, the ability of buyers to play off differentsellers against each other (and vice versa), and the provision of sufficiently accurate informationabout buyers and sellers to evaluate alternative transactions. Roth also identifies an important (and, totraditional economic theorists, surprising) feature of real-some world markets that he terms
repugnance
. In some markets such as those for kidneys or sex, market designers are significantlyconstrained because of social norms or legal restrictions that limit the use of the price system as anallocation mechanism.To apply this framework to the case of innovation, we draw on cross-cutting insights fromresearch on markets for technology (MfT). The MfT literature explores how technological innovation(and other intangible knowledge goods) differs from more traditional goods and services, and theimplications of these differences for business and public policy. To focus our analysis in order to
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