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Is there a market for ideas?

*
by
Joshua S. Gans and Scott Stern

First Draft: 15th September 2008


This Version: 26th 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 ensure
four basic principles: market thickness, lack of congestion, market safety, and avoidance of
“repugnance.” Taken together, these conditions ensure that participants in a market have
opportunities to trade with a wide range of potential transactors (market thickness), that the
market is rapid enough (relative to the speed of transactions) that market participants can
feasibly turn down offers in order to seek better matches (lack of congestion), potential
market participants have a high incentive to participate in the market and avoid strategic
interaction 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 to
charge positive prices for a good (avoidance of repugnance). This paper provides a critical
examination of these criteria for MfT. Our analysis suggests that microeconomic, strategic,
and institutional factors likely inhibit the allocative efficiency of MfT in most
circumstances. For example, Arrow’s disclosure problem suggests that the value of a given
idea 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 a
result, 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, key
institutional developments such as the development of formalized IP exchanges and
increased attention on how to design the patent system to facilitate technology transfer
suggest that effective market design may be possible for some innovation markets. Perhaps
most intriguingly, our analysis suggests that markets for ideas are beset by the
“repugnance” problem: from the perspective of market design, Open Science is an
institution 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.

*
We thank Ashish Arora, Alfonso Gambardella, Carl Shapiro, Harold Demsetz and participants at the Madrid
Markets for Technology and Industrial Evolution Conference, the FTC Microeconomics Conference for helpful
comments and the Australian Research Council for financial assistance. Responsibility for all errors lies with the
authors. Correspondence to: J.Gans@unimelb.edu.au. The latest version of this paper is available at
www.mbs.edu/jgans.
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1. 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 the

economy, 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 productively

employed 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 complementary

assets (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 there

are transactional exchanges in both ideas and technologies, and the rate of “ideas trading” seems to be

increasing 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 organized

market. 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 negotiations

with 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, and

even successful negotiations vary widely in terms of the price and terms over which knowledge is

transferred. As Mark Lemley and Nathan Myrvhold note, “Patents … exist in ... a blind market. Want

to 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 rents

from a given idea are distributed between buyer and seller, the lack of transparent price signals results

in 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 and

large, have mostly developed independently of one another. On the one hand, the market design

literature utilizes formal game-theoretic approaches, most notably from mechanism design, to

evaluate how the rules that govern exchange and allocation impact the efficiency of alternative market

institutions (Myerson, 2008; Roth, 2002, 2008). Over the past two decades, the insights from market

design 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 the

recent synthesis of this literature by Al Roth. Roth (2008) draws on the emerging body of empirical

evidence from real-world market design applications to offer a framework and conditions upon which

market designers can evaluate the effectiveness of their prescriptions. Specifically, Roth highlights

three cross-cutting features of markets that seem to be associated with efficient market-level

exchanges: market thickness (both buyers and sellers have opportunities for trade with a wide range

of potential transactors), lack of congestion (the speed of transactions is rapid enough to ensure

market clearing but slow enough so that individuals have the opportunity to seek alternatives when

considering 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, Roth

suggests that the ability to achieve efficiency in real-world markets depends on participation by a

sufficient number (and diversity) of buyers and sellers, the ability of buyers to play off different

sellers against each other (and vice versa), and the provision of sufficiently accurate information

about buyers and sellers to evaluate alternative transactions. Roth also identifies an important (and, to

traditional 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 significantly

constrained because of social norms or legal restrictions that limit the use of the price system as an

allocation mechanism.

To apply this framework to the case of innovation, we draw on cross-cutting insights from

research 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 the

implications of these differences for business and public policy. To focus our analysis in order to
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develop specific insights, we highlight two core theoretical issues. First, ideas are subject to an

appropriability problem (Arrow, 1962; Teece, 1986): in the absence of strongly delineated and easily

enforceable intellectual property rights, ideas producers may be unable to capture the value created by

their ideas once those ideas are disclosed. Second, ideas are partially non-rivalrous (Romer, 1990;

Bresnahan and Trajtenberg, 1995): a single idea may have multiple applications, and, once the fixed

cost of producing the idea is incurred, may be replicated and diffused at low (or even zero) marginal

cost.1 The main contribution of this paper is to use the market design evaluation scheme proposed by

Roth to assess how these two fundamental features of ideas impact the viability, operation and

structure of a market for ideas.

We highlight three main findings. First, the nature of ideas undermines the market for ideas.

The appropriability problem and non-rivalry significantly undermine the ability to achieve certain

types of contracts and engage in certain types of bargaining essential for an effective multilateral

trading mechanism. For example, both the market thickness and market safety conditions identified

by Roth suggest that ideas buyers should be able to consider multiple offers from multiple potential

buyers before contracting with a particular buyer. This type of transparency is undermined by

Arrow’s disclosure problem; not only will this distort the price at which ideas are bought and sold,

but, more damaging from the perspective of welfare, is likely to lead to poor “match quality” when

valuations are idiosyncratic but the appropriability problem is pervasive. Similarly, for ideas that are

truly non-rivalrous, the initial seller of an idea in an organized market faces the prospect that the first

buyer is likely to subsequently become a seller. In this case, the very existence of an organized

exchange undermines the ability to conduct any trade at all. Our second central finding is a corollary

of the first. Specific institutions, most notably formal intellectual property rights such as patents, play

a crucial role in overcoming the key challenges raised by market design. For example, when patents

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These two insights are central to much of the research in MfT, including the prevalence and rise of ideas and
technology trading across different economic sectors (Arora, et al, 2001; Lamoreaux and Sokoloff, 2001; Gans
and Stern, 2003), the determinants of the innovative division of labor, particularly with respect to “general
purpose” technologies (Arora and Gambardella, 1994; Bresnahan and Trajtenberg, 1995; Gambardella and
Giarrantana, 2008), and the special role played by formal intellectual property rights (such as patents) in
facilitating knowledge transfer across firm boundaries (Arora, 1995; Gans, Hsu and Stern, 2002; 2007). Troy
and Werle (2008) consider a related set of questions concerning trading in patents but emphasize uncertainty in
a manner similar to the MfT literature as opposed to the broader market design focus we take in this paper.
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are effective and enforceable, buyers are able to overcome both the disclosure problem and the

potential for resale by buyers, which facilitates multilateral bargaining and raises the potential for

efficient matching. Indeed, this pattern is reflected in the phenomena – the rise of formalized patent

exchanges and auctions such as Ocean Tomo demonstrate the potential for organized markets in

abstract ideas that are protected through the patent system. Our final and perhaps most speculative

observation is that most robust markets for ideas are those where ideas are free. This is not simply

because, in many respects, those markets satisfy Roth’s conditions for effective market design but

also because those markets overcome constraints arising from repugnance.

Together, these conclusions raise subtle issues about the role of property rights in innovation

(Demsetz, 1967). From an historical perspective, a great deal of knowledge has been produced and

diffused through, effectively, communal ownership: Open Science is premised on a near-absence of

formal property rights that allow the researcher who produces the knowledge to restrict use by others

in the scientific community. Given the non-rivalry of many types of scientific knowledge, it is

perhaps not surprising that such communal ownership has been the norm. At the same time, there has

been a shift towards the use and enforcement of formal intellectual property rights, even for upstream

basic research. At least in part, the inability to develop effective institutions to support market-level

exchanges of basic research knowledge is shaped by the very significant transactions costs of doing

so, particularly in the face of long-standing communal norms regarding sharing and the free use and

exploitation of ideas.

We emphasize that this analysis is inherently speculative and incomplete. First, while there

has been significant progress in understanding the role of institutions and the strategic context that

shapes bilateral trade in ideas and technology, it is fair to say that, outside of some extreme cases, the

MfT literature has essentially abstracted away from the conditions that would allow the production

and distribution of ideas to be efficient (in the strong sense indicated by the market design literature).

While we could evaluate the market design implications of other central themes of the MfT literature

(from network effects to the dynamics of knowledge accumulation), we focus here on the

appropriability problem and non-rivalry in order to illustrate how these two central features of ideas

raise fundamental challenges for the design and operation of a market mechanism that results in
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allocative efficiency. Second, while we draw heavily on prior empirical research and more qualitative

assessments of the underlying phenomena and institutions, this paper does not break new empirical

ground. While the analysis does hold several testable empirical implications, and we hope to evaluate

these implications in future work, the objective of this paper is to synthesize key implications of our

theoretical and empirical understanding of the MfT in light of the questions raised by a market design

approach. Finally, so that we can focus on “extreme” cases that get at the essential elements of the

underlying phenomena, our analysis is essentially focused on the challenges of market design for

relatively abstract and pure “ideas.” While the MfT literature incorporates both pure ideas and

technologies at a more advanced stage of development and commercialization, our examples and

analysis will focus primarily on the ability to exchange and distribute ideas that are disembodied from

physical artifacts (such as a product) over which well-defined property rights can be established.

The outline of this paper is as follows. In the next section, we provide an overview of the

lessons from market design for the effective functioning of markets. Section 3 then considers how the

nature of ideas themselves impacts upon the effectiveness of markets for ideas. Section 4 then

examines the impact of repugnance and how this has potentially led to the creation of certain

institutional structures that might support the market for ideas. A final section concludes.

2. Lessons from Market Design

Though the role of institutions in supporting market exchange was appreciated by classical

economists, including Adam Smith, the formal study of market design can be traced back to the

Arrow Impossibility Theorem (Arrow, 1951). Building on Arrow’s development of social choice

theory, Leo Hurwicz introduced a rigorous and formal framework for evaluating alternative rules for

exchange and market institutions (Hurwicz, 1972; 1973). Hurwicz’s crucial and fundamental insight

was that potential participants in a market voluntarily agree to play by the rules of the “game”

associated with a particular “market mechanism,” and that different market mechanisms can lead to

very different outcomes in terms of participation and efficiency. In other words, market design

matters, and there was a significant opportunity to enhance efficiency through the design of the
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market mechanism (i.e., mechanism design). This game theoretic (and highly abstract) approach to

evaluating market and social institutions took off as a subfield within economics in the late 1970s,

focusing in particular on the case when potential participants to an exchange hold private information,

and it becomes critical to examine the incentives agents have to (truthfully) reveal that information.2

Though extremely elegant, most research in mechanism design from the 1970s (and even

today) is highly abstract and removed from the design and operation of real-world markets. However,

an emerging body of research (and an emerging group of researchers) is attempting to use the tools

and insights from mechanism design to evaluate (and even design) real-world markets and exchange

institutions. From the design and operation of government auctions for telecommunications spectrum

(McMillan, 1994; Milgrom, 2004; Klemperer, 2004; Cramton, 2002, 2008) to the evaluation of

algorithms for “matching” medical residents with hospitals (Roth, 2002) to the development of online

auctions for search engines such as Google (Edelman, Ostrovsky and Schwarz, 2007), there has been

an explosion of applications in which the tools of mechanism design are used in the service of market

design. For example, the introduction of auctions for telecommunication spectrum not only served to

enhance the revenue raised by agencies such as the FCC but is designed to ensure that the allocation

of spectrum rights reflects the valuation of those rights by telecommunications firms.

It is useful to recall exactly how market design – the rules of the game by which exchange can

occur -- matters for the efficiency of market operation. Consider a simple illustration. Suppose that a

seller, S1, holds an asset, A1, and is engaged in negotiation with a potential buyer, B1. If S1 values

the asset at c1 (i.e., would prefer to “consume” the asset themselves rather than trade at any price less

than c1) while the buyer values it at v1 (i.e., would prefer to have no asset rather than pay more than

v1), an exchange is between S1 and B1 is desirable if v1 > c1. Of course, if the only opportunity for

exchange is within the context of a bilateral negotiation between S1 and B1, and S1 and B1 do not

know the precise valuation placed on the asset by the other party, there are significant opportunities

for inefficiencies arising from strategic bargaining. For example, desiring to capture as much value as

2
These contributions were recently honored with the 2007 Nobel Prize in Economics, awarded to Hurwicz and
two preeminent follow-on researchers Roger Myerson and Eric Maskin. This follows on from previous Nobel
prizes along the same research stream including Reinhard Selton, John Nash, John Harsanyi, James Mirrlees
and William Vickery.
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possible, S1 may demand a price well above v1; if that price is above the (also distorted) offer from

B1, it is possible that S1 and B1 are unable to reach an agreement even though an agreement between

v1 and c1 would benefit both parties. From the perspective of market design, a bilateral exchange

mechanism may suffer from significant bargaining inefficiencies.

Now consider what might occur under a multilateral exchange mechanism. Suppose there is a

market mechanism in which (a) many buyers and sellers are able to participate, (b) each seller is

offering an imperfect substitute for the goods of other sellers, and (c) the active offers of all buyers

and sellers are publicly revealed to all market participants (such a set-up is not too dissimilar from an

online auction site such as eBay or a ticket reseller such as StubHub). Relative to an isolated bilateral

negotiation, the “outside option” for any given transaction is no longer the value realized from “no

exchange” but is now shaped by the next best transaction available in the market at the time that

trading occurs. The existence of close and available substitutes greatly limits the scope for strategic

bargaining, reducing the potential for inefficiency and bargaining breakdown. In other words, with a

public multilateral market exchange, the allocation of assets and the prices at which assets are traded

are a function of the endogenous outside options of both buyers and sellers, enhancing the efficiency

of potential trade.

There are two additional properties of such an allocation mechanism that of considerable

interest relative to bilateral negotiations. First, since the prices that are being offered are public, the

resulting allocations of assets may (under the right conditions) be stable. For example, if a second

potential buyer, B2, has a valuation for the S1 asset of v2, and v2 > v1, it may be possible to design

the market so that it is much more likely that B2 ends up outbidding B1 in the context of a multilateral

negotiation. When an allocation is unstable, market participants have incentives to engage in strategic

behavior in order to provide themselves opportunities outside of the official market (e.g., trying to

close deals before the market opens, or posing as a buyer in order to become a seller later on); in

contrast, a market design that results in a stable and efficient allocation also maximizes the incentives

for (non-strategic) market participation. Second, multilateral markets require interested parties to

compete with one another, resulting in the transformation of private information about value into

public information about relative prices. In other words, when there is a sufficiently large number of
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buyers and sellers and the market mechanism allows for vigorous competition among buyers and

sellers, respectively, the range of prices at which transactions take place are considerably narrowed as

the result of the emergence of endogenous outside options and the requirements for a stable

allocation. The transparency of prices not only enhances the ability to allocate assets within a market,

but, over time, allows the market to provide informative signals about the value of different assets (or

activities), and allows benchmarking across transactions over time.

The contrast between isolated bilateral exchange and a transparent multilateral market is, of

course, extreme, and does not provide the diagnostics required for evaluating the market for ideas. To

accomplish that objective, we draw on the synthesis of Roth (2008), who offers three interdependent

criteria for evaluating alternative market designs: thickness, lack of congestion and market safety.

Roth acknowledges that each of these elements interacts with the others, and, drawing on the

extensive work of market design economists over the last 15 years, suggests that balancing these

objectives seems to be more art than science. With that said, it is useful to define and develop each

criterion as a precursor for our identification of the potential challenges (and potential institutional

approaches) for establishing markets for ideas with desirable properties.

Market Thickness

Market thickness is the degree to which a large number of buyers and sellers participate

within a market so that each buyer and seller has an opportunity to engage in an effective “match.”

When all buyers and sellers are very similar to each other, the importance of match quality is

relatively low and market thickness is of reduced concern. However, while traditional economic

theory tends to emphasize markets with large quantities of substitutable goods, a central challenge for

real-world market design is that the value from exchange within a market often depends on whether

potential trading partners that allow idiosyncratic matching participate in that market.

Consider Roth’s example of kidney exchange. While many patients with end stage renal

disease are able to find a willing (living) donor, many potential donors are an incompatible match

with their intended recipients (as the result of incompatible blood types, etc). While the potential for a

match between any two individuals is low, the potential for matching increases dramatically if each
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donor pair (i.e., pair of individuals where one requires and one is willing to donate a kidney) is

allowed to engage in exchange with other donor pairs. The introduction of a “thick” market for kidney

exchange among donor pairs allows a range of useful kidney donations that might not have otherwise

occurred, as the result of the ability of that market design to facilitate matching.

Lack of Congestion

The second property of effective market design is ensuring a low level of congestion.

Congestion arises when the timing or circumstances of potential trades requires that trades are

completed without being able to assess alternative options in the marketplace. Even if many agents

are participating in a market, the ability to achieve a high match quality and use the power of market

institutions to limit the scope for strategic bargaining depends on the ability of each potential trader to

consider alternative trading options. While a prerequisite for a lack of congestion is market thickness

(i.e., you need to have enough traders in the market to make bargaining with others worthwhile), the

degree of congestion also depends on the precise rules and timing of the market mechanism.3 For

example, most houses in Melbourne, Australia, are sold by auction. These live (i.e., non-electronic)

auctions are conducted at a time chosen by the seller in front of the house for sale. If two similar

homes are auctioned at the same time, a single seller cannot physically be in both locations and so

sellers effectively have to choose to bid in one auction rather than the other (though mobile phones

provide some opportunity for coordination). Conversely, if the homes are sold at different times,

buyers must choose between completing a sale for a house currently at auction or foregoing that house

and participating in a future auction (where the selling price is not yet known!). Though the market

for Melbourne homes is thick in a technical sense, the design of that market has resulted in a

significant congestion problem.

There are at least two sources of inefficiency arising from congestion. First, similar to market

thickness, congestion can result in inefficient matching between buyers and sellers (e.g., in a less

congested market, there may be opportunities for trade in which the winners of two different auctions

3
Roth provides some dramatic illustration of congestion in the market for medical residents. We focus on the
case of the Melbourne housing market to illustrate that congestion can occur even in relatively unregulated
markets.
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effectively traded with each other, and each believed that they were better off). Second, and more

subtly, the degree of congestion is perhaps the central determinant of whether exchanges take place in

the shadow of an endogenous outside option for both parties. Specifically, in a congested market, the

trading mechanism precludes playing multiple offers against one another (the timing does not allow

it), enhancing the scope for strategic bargaining and increasing the likelihood that some transactions

will simply not occur. This is most easily seen when market timing unravels as one-side of the market

tries to preempt competition with early offers (Roth and Xing, 1994). While prices and trades in an

uncongested and thick market are likely to be consistent, transparent, and stable, the outcomes from a

congested market are uninformative and unstable. In a congested market, it is difficult for market

participants to infer (even after the fact) whether the prices for a given transaction reflected

fundamental aspects of relative supply and demand or whether prices and transactions simply

reflected strategic bargaining outcomes.

Market Safety

The final aspect of effective market design is market safety – ensuring conditions so that

market participants are willing to (truthfully) reveal their preferences and “type.” For example, in

order to encourage an efficient level of supply, potential sellers who face a high manufacturing cost

may only be willing to sell at a high price. The challenge for market design is to design market

institutions that allow this information to be revealed without being exploited. In the traditional

automobile “market,” potential buyers have had to visit individual dealerships, and negotiate with

individual automobile salespeople. Concerned about the potential for exploitation in the bargaining

process, potential buyers routinely hide their degree of interest in a particular car (or buying at all),

and attempt to reach an agreement well below the maximum price they might be willing to pay (of

course, the reverse incentive is true for the car seller). Recent innovations such as Autobytel and

online second-price automobile auctions allow potential buyers to truthfully reveal their level of

interest in an automobile as the result of a market mechanism in which the price is determined by

competition among multiple dealers (in the case of Autobytel) or by the behavior of other bidders (in

the case of a second price auction). Indeed, recent evidence suggests that those who seek out
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multilateral trading mechanisms are often those who may be expected to be particularly

disadvantaged in the context of isolated bilateral negotiations (Scott Morton, et.al., 2001; Zettelmeyer

et.al., 2004). In other words, alternative market designs induce very different types of information

revelation, and, in many cases, it is possible to structure the market so that information revealed by

market participants allows all potential traders to increase their expected gains from trade.

3. How does the nature of ideas impact the market for ideas?

This section applies the market design criteria proposed by Roth to evaluate the challenges

(and conditions under which) a market for ideas may be feasible and/or efficient. Our analysis builds

on the emerging body of research on MfT that highlights the potential gains from trade in ideas and

the strategic foundations of commercialization through the market for ideas (Teece, 1986; AFG, 2001;

Gans and Stern, 2003). At the heart of the MfT literature is the simple but powerful notion that the

value of ideas depends on the institutions and organizations in which those ideas are embedded. As

originally emphasized by Teece (1986), the ability to create value from innovation depends, in large

part, on whether the underlying idea can be combined with complementary assets that allow potential

users and consumers to benefit from a new technology. In many cases, the key complementary assets

required for effective commercialization are not under the direct ownership or control of the innovator

– indeed, this mismatch between the origin of innovation and the effective locus of commercialization

is inherent to the uncertainty surrounding the innovation process itself (Rosenberg, 1998). An

important corollary of this Teecean logic is that the incentives for innovation are themselves

dependent upon the effectiveness and efficiency of process by which ideas are “matched” with

potential downstream applications and users.

Our objective here is not to provide a thorough evaluation of the crucial role of matching and

complementary assets in the commercialization and diffusion of new ideas and technology; instead,

we focus on the narrow question of how the nature of innovation impacts the feasibility and potential

effectiveness of a market for ideas. In particular, while we acknowledge that isolated bilateral

transactions in ideas and technology are quite valuable, we are seeking to extend that analysis by
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considering the conditions and terms under which a true market for ideas (or, relatedly, a market for

technology) can emerge (and if not, why not). Is it possible to develop construct trading environments

for ideas in which (a) outside options emerge endogenously as the result of competition, (b) pricing

and value division are transparent to both buyers and sellers, and (c) allocations are stable (i.e., would

survive even if additional opportunities for negotiation and trade emerged)?

We focus on three central characteristics of innovation that we believe offer insight into the

feasibility and efficiency of the market for ideas: ideas complementarity, value rivalry, and user

reproducibility. Each of these characteristics is a distinctive aspect of innovation, and each may be

more important for some types of ideas or technologies rather than others. First, ideas

complementarity results from the fact that the value of any given idea depends on its combination

with others. For example, the value of a software algorithm depends crucially on the availability and

properties of related pieces of software (and hardware, for that matter). When ideas are of little value

in isolation, downstream users may require access to multiple ideas in order to gain value from each

idea. Ideas complementarity arises from the interdependence among different ideas in particular

applications and contexts (Rosenberg, 1998), and the ability to trade a given idea (and the terms of

that trade) may depend crucially on the availability and terms of access to other ideas for which such a

strong interdependency exists. Second, value rivalry is a subtle consequence of the non-rivalry of

ideas (Romer, 1990). In the traditional formulation, ideas and knowledge are non-rivalrous in use but

also in valuation: the ability to read a book does not depend on whether others have read that same

book, and the enjoyment that one reader gets from a book is independent (at least to first-order) of

whether others have also had access to the same reading material. However, in many applications and

contexts, ideas may be non-rivalrous in use (many people can have access to the same piece of

information) but may be rivalrous in value (the value gained from having access to that information is

declining in the number of other individuals who have access to the same idea). To take but one

extreme case, insider information in about a financial asset is non-rival in use (many people could in

principle have access to that information) but the advantage received from the information depends on

it being maintained as a secret. A less extreme case of value rivalry arises in the context of drug

development – while many firms can, in principle, take advantage of a scientific insight into the
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origins of a disease (e.g., the role of a particular gene), the private value of that scientific knowledge

is higher if only a single downstream firm is able to take advantage of it in the commercialization

process. The degree of value rivalry, thus, depends on whether the value of an idea to a potential

user/buyer declines when others have access to the same idea. Finally, user reproducibility is a

particular manifestation of the low cost of replication of information an ideas. While the low

replication cost of information is well studied, we will focus on the case when the buyer of an idea

can also be in the position to replicate that idea for use by others. To take but one extreme example,

the replication cost of music has been low since the development of recording technologies such as

the phonograph and magnetic tapes; however, the development of digital music formats combined

with the connectivity of the Internet meant that individual music consumers could also share (or even

sell) that recording to a large number of other potential listeners (as indeed occurred with the rise of

Napster and other music sharing exchanges). The degree of user reproducibility is measured by the

extent to which potential ideas buyers are able to replicate that idea at low cost and share or sell that

idea with other potential ideas buyers.

Each of these three distinctive properties of ideas – ideas complementarity, value rivalry, and

user reproducibility – are likely to pose distinctive challenges for the feasibility and operation of a

market for ideas. In the remainder of this section, we focus on the influence of each of these factors

on the criteria proposed by Roth. By construction, we do not seek to offer a comprehensive

assessment; instead, we seek to illustrate in an exploratory fashion how the nature of ideas impacts the

market for ideas, and the potential for alternative institutions in shaping the feasibility of organized

exchange in ideas.

Market Thickness and Ideas Complementarity

Market thickness is perhaps the central challenge in establishing a well-functioning market

exchange system, particularly when matching is important. In the absence of participation by a

sufficient number of buyers and sellers, transactions may reflect a low level of match quality or not

occur at all. While market thickness is a challenge in many settings, many have particularly noted the

lack of thickness in the market for ideas and knowledge (Lemley and Myhrvold, 2008; Troy and
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Werle, 2008). Even when strong intellectual property rights exist (e.g., ideas are embedded in

patents), market development has been of only limited scale and scope (Lamoreaux and Sokoloff,

2001). Notably, while patent auctions have long been discussed (Barzel, 1968; Kitch, 1977; Kremer,

1998; Abramowicz, 2006), their historical relevance has been very limited. As we discuss in more

detail below, formal patent auctions, such as those organized by Ocean Tomo, have only operated for

the past few years, and most analysis of these auctions suggest that they cover a relatively narrow

range of innovation and winning bids are at relatively modest prices (Kanellos, 2006). The lack of a

thick market in patented ideas seems at first puzzling, given that there should (in principle) be little

difference between a patent market and a secondary market for a more traditional capital good such as

machinery, property or collectibles.

While the lack of market thickness for knowledge – even patented knowledge – may have

many sources, ideas complementarity is likely to pose a central challenge to market design. If the

value of a given (patented) idea depends on access to other (patented) ideas, then the returns to

participation in a market depends on whether the market is likely to include all of the required

knowledge inputs. In the absence of being able to aggregate across a “package” of intellectual

property assets, potential buyers do not have incentives to offer a high price for any individual asset.

From the perspective of a potential seller, it would indeed be preferable if all other sellers first

engaged in trade with a particular buyer, thus offering a significant opportunity for hold-up as the last

remaining IP bottleneck. While the challenges of hold-up over intellectual property and the potential

for patent thickets has been extensively discussed (Grindley and Teece, 1997; Shapiro, 2001; Heller,

2008), we are making the more nuanced claims that the potential for hold-up undermines the

incentives for both buyers and sellers to participate in an organized exchange where many (but not all)

relevant IP assets may be offered.4

It is important to emphasize that the lack of market thickness is not simply due to the

potential for hold-up (we will discuss potential institutions to mitigate hold-up below). In particular, a

4
The market design problem that arises from ideas complementarity is analogous to the more general problem
in auction design when different items have interdependent valuations. Milgrom (2007) emphasizes that the
problem of interdependency is among the most challenging issues in effective auction design, and proposes a
framework for evaluating how to develop a mechanism that allows for such interdependencies to be taken into
account in certain applications such as telecommunications spectrum auctions.
15

key challenge in commercialization is that the value from a single innovation is only realized over

time with the uncertain emergence of complementary ideas and technologies (Rosenberg, 1998).

When ideas are developed over time, and ideas are complementary with one another, it is extremely

difficult to develop a market mechanism in which each idea receives an appropriate market valuation

(McDonald and Ryall, 2004).5 The market design challenge is heightened when the precise form and

timing of future ideas and technologies are difficult to anticipate, and some of the most valuable

“packages” are serendipitous combinations that emerge from disparate settings.

It is useful to note that, when ideas complementarity is relatively unimportant, it is possible to

support thick markets for knowledge and ideas. For example, the recent rise of platforms for buying

and selling applications software – such as Apple’s iTunes Application Store – seem to provide

concrete examples where an exchange mechanism can exist as long as the interdependency among

different offerings is not too severe. Apple offers developers free (and easily accessible) product

development and digital rights management tools to develop their ideas and applications. Then, while

Apple assesses potential applications to ensure that they meet minimum quality thresholds and

technical standards, Apple allows developers to offer their iTunes applications for sale on an

integrated platform, choose their own pricing (including the option of free distribution), and has

established a standard revenue sharing plan (in which Apple retains 30 percent of all revenue). In part

by designing a platform technology that minimizes the interdependency between individual

innovations, Apple has induced the development and exchange potential for more than 15,000

different application ideas, resulting in more than 500 million exchange-based transactions.6

When complementarity between ideas is important (and cannot be overcome through a

modular technology design approach), and assuming that effective intellectual property rights are

available (a topic we return to below), it is still possible to aggregate different ideas into a single

package. Both patent pools and formal standard-setting processes reflect partial attempts to solve this

aggregation problem. Patent pools combine different pieces of intellectual property owned by

5
This is once again analogous to the problems of combinatorial auction design emphasized by Milgrom (2007).
Though we do not pursue it here, the market design challenges involved in aggregating ideas developed over
time offers a potentially useful social function for so-called patent trolls or speculators, who acquire IP rights
during an embryonic phase
6
CNet News, 16th January, 2009.
16

different rights holders into a package which potential users can license in order to gain the freedom

to use a set of interdependent technologies. These cooperative marketing agreements by IP rights

owners have the potential to overcome the coordination problem involved in selling overlapping

ideas, and seem to serve as a mechanism in which a single (aggregate) seller encourages participation

by potential buyers through the availability of “one-stop shopping” (Lerner and Tirole, 2004; Chiao,

et.al., 2007). Standard-setting organizations also play a role in encouraging market thickness, and do

so in an institutional context in which the values of both buyers and sellers are explicitly weighed in

the standard-setting process (Lerner and Tirole, 2006; Simcoe, 2008).

A final institutional response is to simply design the market in a way that allows the entire

“solution” of complementary ideas to be combined (and valued) in a single package. This is the

essence of a prize system. While the concept of innovation prizes have been around for centuries

(Mokyr, 2008), there has been a recent flurry of innovation prize offerings (mostly by philanthropic

organizations) ranging from reusable spacecraft to energy efficient cars to the development of specific

vaccines.7 Of course, while a prize mechanism does encourage supply and provides a particular type

of predetermined demand for an innovation, most ideas production is resistant to a prize mechanism

because of the inability to completely and accurately specify the performance criteria and relevant

parameters in advance (indeed, specifying the fundamental requirements of a design is often the most

important “idea” regarding that design). More generally, it is useful to emphasize that each of the

three institutional responses to ideas complementarity -- patent pools, standard-setting, and prizes --

achieve market thickness by (a) limiting the range of technical alternatives that can be combined (i.e.,

one may not be able to achieve operability outside the “standard” or one may ignore key design

elements in the prize specification) and (b) leaving the status of future ideas and technologies

ambiguous.

7
Prizes and forward contracts need not be large scale. For example, Innocentive allows established firms (who
are vetted for credibility) to post problems they seek to have solved. One challenge set $100,000 for the delivery
of a non-ion sensitive super absorbent polymer while another by Kraft looks for bakeable cheese technology
partners and many have been awarded (100 in all). Overall more than 140,000 people from most countries in the
world have registered as potential solvers on the site.
17

Congestion and Value Rivalry

Congestion – the difficulty of considering multiple options at a given point in time – arises

when market participants have an incentive to manipulate market timing to either pre-empt or delay

trade. Roth emphasizes that, even if exchange is occurring in what seems to be a thick market,

congestion can significantly reduce market efficiency by limiting opportunities for effective matching

and distorting the prices at which transactions take place. We build on this logic by examining the

impact of value rivalry – a condition arising when the value of the idea to each potential buyer is

declining in the number of other potential buyers with access to that idea – on market congestion.

When an idea is truly non-rivalrous, both in use and in value, potential buyers are not directly

influenced by whether others have had access to or even purchased the same idea. As a result, buyers

have no particular incentive to limit whether a seller seeks additional sales of that idea (and, indeed,

encouraging additional sales may have a positive impact by encouraging innovation incentives).

However, when there is a high degree of value rivalry, the disclosure of the idea (even if not the sale)

to one potential buyer reduces the value of that idea to other potential buyers. As emphasized by

Anton and Yao (1994) and Gans and Stern (2000), the bargaining power of an ideas seller in a

bilateral negotiation arises in part from their ability to agree to keep the idea a bilateral secret,

conditional on a sale.8 However, bilateral secrecy is at odds with the ability of an ideas seller to play

multiple potential buyers off against one another before agreeing to an exclusive sale to the highest

bidder. If the disclosure of the idea to all potential bidders undermines the valuation of the idea by

each of those bidders, ideas sellers may be very limited in their ability to consider multiple offers for a

single idea.

There are, of course, some sectors in which a limited market for ideas exists, and where it is

possible to observe the consequence of value rivalry and limited appropriability. For example, in the

market for movie scripts, a screenwriter will prepare a short treatment that, in some circumstances,

can be marketed simultaneously to multiple potential movie production companies. While this

facilitates effective matching (and, in the best of circumstances, allows the screenwriter to play

8
This is a refinement on the classical statement on disclosure due to Arrow (1962) and emphasized in
discussions of the degree of appropriability (Teece, 1986; Levin, et.al., 1986).
18

different producers off against one another), the history of the movie industry is littered with stories in

which a movie treatment is originally “rejected” by a producer who then develops the idea or a very

similar variation. In some cases, this can lead to multiple studios producing very similar movies at the

same time, limiting the box office success of each offering.9

It is perhaps not surprising that the main consequence of value rivalry is likely to be

congestion. Rather than dilute the valuation of all potential buyers by disclosing (at least part of) the

idea broadly, a buyer and seller may agree to engage in bilateral negotiations for a fixed period of

time, with significant penalties for disclosure to third parties. That is, they retain value by limiting

use. For example, in high-technology industries such as biotechnology and software, there are fairly

well-established protocols in which a bargaining over the details of a license (including the detailed

disclosures of the underlying technology) are conducted on an exclusive basis, and with both parties

agreeing to limit contact with other potential buyers and sellers for a certain amount of time (and

conditions). When trade in ideas is structured in this way, as a series of bilateral negotiations rather

than a multilateral market, there may be significant efficiency losses due to poor match quality and

significant uncertainty regarding the “fair” price for an idea of a given quality. As emphasized by

Lemley and Myhrvold (2008):

Willing licensors and licensees can’t find each other … no one can know whether they are
getting a steal or being had. When parties do license patents, the prices are (to the extent we
can tell) all over the map. And the rest of the world has no idea what those prices are. This, in
turn, means that courts lack adequate benchmarks to determine a “reasonable royalty” when
companies infringe patents. The lack of a real, rational market for patent licenses encourages
companies to ignore patent rights altogether, because they cannot make any reasonable
forecast of what it would cost them to obtain the licenses they need and because they fear that
they will pay too much for a technology their competitors ignore or get on the cheap. At the
same time, ignorance of prices permits unscrupulous patent owners to “hold up” companies
that make products by demanding a high royalty from a jury that has no way of knowing what
the patent is actually worth.
In other words, value rivalry poses a market design challenge that results by and large in a sharp

tradeoff for buyers and sellers in the market for ideas: either engage in isolated bilateral transactions

that involve inefficient allocation or multilateral market-based bargaining that can reduce the

productive value of completed trades.

9
See McAfee (2002), Table 7.1, p.155. Similar releases around the same time include Robin Hood (1991),
volcano (1997), animated ants (1998), asteroids (1998), mars missions (2000), animated urban to wild animals
(2005), animated penguins (2007) and Truman Compote (2007).
19

Safety and the control of user reproducibility

The efficient functioning of markets relies on participants being willing to make pricing

offers that reflect their valuation or cost of the transaction. However, when such offers can be

exploited, transactions can become unsafe and caution can lead to a lack of transparency as well as

reluctance to enter negotiations or making credible pricing offers. Put simply, the ability of prices to

signal opportunities for productive trade are muted or eliminated.

The risk that price signals break down in the context of ideas trading can arise in several

ways. The first is directly related to user reproducibility. When users can reproduce an idea at a zero

or very low marginal cost, there are significant limitations on whether the seller can control how users

exploit or distribute the idea. For example, it may be that the majority of potential customers for a

digital song intend to use it themselves and value that song at $3 per user. However, there may exist

another agent, indistinguishable from ordinary users, who has the capacity to re-sell or otherwise

distribute that song. So instead of being able to price that song at $3, the seller needs to price it against

the potential competition from potential re-sellers (or their and buyers’ expectations of their

existence). At the extreme, no positive price can be secured.10

The ability to expropriate ideas is particularly salient in the presence of an organized market

mechanism. While most discussions of Arrow’s disclosure problem tend to emphasize its impact on

bilateral negotiations, the potential losses arising from disclosure may be more salient when the seller

has an opportunity to offer a competing “version” of the same or a very similar idea. The opportunity

for buyers to also engage in selling the idea (thus undercutting the sales of the original seller) are

more likely when there is a well-functioning market that facilitates low-cost transactions.11

The simplest way to address the potential for user reproducibility is by creating significant

cost to additional sharing by users. Two approaches stand out. First, in the face of massive sharing of

10
Boldrin and Levine (2008) argue that, in many settings like this, inertia on the part of would be re-sellers
would limit this extreme outcome. Nonetheless, it remains true that pricing signals are distorted because of
potential competition leading to strategic behavior that is a barrier to market efficiency.
11
The intermittent windshield wiper illustrates the classic case of this problem (Seabrook, 1996). First invented
by Bob Kearns, he fitted his Ford with a prototype and drove it down to the company to see if they were
interested in purchasing it. They looked over it extensively and even employed Kearns for a time. In the end,
Ford built the device into their cars without any compensation or rights traded from Kearns. Kearns went on to
spend the rest of his life fighting car companies for that compensation (successfully as it turns out).
20

digital media (particularly music), a number of alternative digital rights management technologies

were developed and deployed over the last decade. Interestingly, while DRM is usually effective

against sharing for the average user, most DRM technologies have not been able to withstand

sustained attempts at decryption by hackers who are strongly committed to free sharing of music and

other digital media (a phenomena we discuss in more detail in Section 4). Because the Internet allows

markets for free music to be developed relatively easily (and with few opportunities for enforcement

by music companies), technological approaches to DRM have tended to be undermined by the

presence of markets and the inability of record producers to distinguish between passive consumers

and active file-sharers. Second, the recording industry has incurred significant costs (both monetary

and in terms of their reputation) through attempts at aggressive enforcement of those involved in file

sharing, particularly individuals who provide significant levels of supply without copyright

permission. While there are some high-profile cases, the costs of enforcement against average users

would be extraordinary, and so the recording industry currently is unable to use its intellectual

property in a way that allows it to enforce against infringement by buyers who face a low cost of user

reproducibility.

Taken together, our analysis suggests that striking facets of the nature of innovation and ideas

– ideas complementarity, value rivalry, and user reproducibility each pose specific and fundamental

challenges for the market design criteria proposed by Roth. While one could of course argue that

Roth’s criteria are not perfect, or are more applicable to the particular context which he studies (e.g.,

matching markets for medical residents), the analysis does suggest that the lack of organized markets

for ideas in many contexts are not simply an historical accident or a reflection of the fact that a market

would have little value; instead, there are significant limitations on the feasibility of the market for

ideas given the inherent challenges in market design. In other words, in the absence of specific

institutional mechanisms to overcome these challenges, the nature of ideas undermines the

effectiveness of the market for ideas.

The role of intellectual property on the design of markets for ideas

So far, we have been ambiguous about the precise role played by formal intellectual property
21

rights in shaping the feasibility and efficiency of a market for ideas. However, a review of each of the

three prior sections offers a striking lesson: in each case, effective intellectual property rights (along

with an ability to enforce) provided at least an imperfect solution to the challenges raised by the

nature of ideas for the market for ideas. While formal IPR such as patents have been rated

traditionally as having only a modest importance in capturing the rents from innovation (Levin, et al,

1987; Cohen, et al, 2000), this evidence has mostly been based on firms and settings where the main

way in which intellectual property is being used is as a mechanism to insulate a company from

competition during commercialization.

When the opportunities arising from contracting and collaborative commercialization are

high, formal intellectual property such as patents play a far more prominent role. Effective formal

intellectual property rights allow potential users to aggregate multiple ideas covered by disparate

patents (thus reducing the challenges arising from ideas complementarity), offer disclosure without

the risk of expropriation (reducing the problems arising from value rivalry), and, if enforcement is

feasible, constructing an entry barrier that significantly reduces the potential for user reproducibility.

The special role played by formal intellectual property in organized exchange markets for ideas is

apparent across a range of settings and applications.

First, and perhaps most strikingly, the rise of so-called innovation exchanges such as

OceanTomo have evolved over time into auctions and transactions focused on technologies covered

by formal intellectual property protection (in their most recent auction, the entire portfolio of

auctioned items are covered under a US patent grant). A similar phenomena can be seen in the context

of organized university licensing – while many invention disclosures do not induce a patent, a very

high majority of all university licensing activity involves inventions for which a patent has been

applied.

Second, while the management of IPRs – especially with regard to diverse ownership of

complementary ideas – is an issue for creating market congestion, the ways in which patents can be

used may directly help to enhance market operation. For example, in Gans, Hsu and Stern (2008), we

find direct evidence that the hazard rate of licensing an innovation in the market for ideas (by a

technology entrepreneur) is closely linked to whether a patent for that idea has been granted;
22

apparently, it is far more difficult to achieve a licensing agreement in the absence of a patent grant (a

finding which also raises the idea of the potential value from accelerating the process of application

and grant). Similarly, Lemley and Myhrvold (2008) argue that changes in the rules regarding

licensing can have a dramatic impact on the effectiveness of the market for ideas:

The solution is straightforward—require publication of patent assignment and license terms.


Doing so will not magically make the market for patents work like a stock exchange; there
will still be significant uncertainty about whether a patent is valid and what it covers,
particularly since patents tend by their nature to be unique goods. But it will permit the
aggregate record of what companies pay for rights to signal what particular patents are worth
and how strong they are, just as derivative financial instruments allow markets to evaluate and
price other forms of risk. It will help rationalize patent transactions, turning them from secret,
one-off negotiations into a real, working market for patents. And by making it clear to courts
and the world at large what the normal price is for patent rights, it will make it that much
harder for a few unscrupulous patent owners to hold up legitimate innovators, and for
established companies to systematically infringe the rights of others.
This would certainly allow some benchmarking and make it easier to define prices although

enforcement might be costly. However, it does highlight the potential for considering alterations to

patent right obligations that might facilitate the establishment of markets.

Finally, IPRs provide some degree of protection against the market safety issues outlined

above. For instance, patent rights explicitly prevent would-be buyers from using the idea for

commercial gain without the permission of the seller. However, even in this case, as Arora (1995)

notes, tacit knowledge can accompany patent rights and this tacit knowledge is vulnerable to

expropriation. Nonetheless, in environments were the subsequent use of an idea – through sales,

revenues or profits – can be measured in a verifiable way, an IP rights holder can offer a licensing

contract absent full disclosure ex ante that shares the risk or insures the buyer against the possibility

that the idea turns out to be of low quality or limited use.

More generally, this discussion highlights the fact that formal IP rights play a special role in

facilitating the operation of a market for ideas. Whereas Gans, Hsu and Stern (2002) emphasize that

formal IP rights such as patents encourage collaborative (but bilateral) commercialization, the

analysis here suggests that patents play an even more important role in multilateral settings, where the

potential costs of expropriation are large as the result of the ability of an expropriator to exploit that

market in taking advantage of the ideas seller’s disclosure. This results in our second key finding:

specific institutions, most notably formal intellectual property rights such as patents, play a crucial
23

role in overcoming the key challenges raised by market design. However, as we discuss in the next

section, it is also true that the exercise of market power through patents also has the ability to

undermine the operation of the market for ideas as the result of significant restrictions on monetary

transfers.

4. Repugnance in the Market for Ideas

While our previous discussion indicates significant challenges in the design and operation of

the market for ideas, the paucity of organized ideas exchange at positive prices is still something of a

puzzle, given the potentially high returns to be realized from matching and transparency. Roth (2007)

notes similar puzzles – a lack of exchange mechanisms at positive prices -- across a wide range of

contexts. For example, there are legal restrictions on establishing markets in areas such as organ

trading or the tossing of dwarves. These laws are (a) hard to explain in pure economic terms (for

instance, there is no prohibition on organ donation and non-dwarves can be tossed with abandon) and

(b) vary over time and jurisdiction. Roth instead argues that there is an exogenous constraint on the

establishment of some markets: repugnance.

To be precise, repugnance is not necessarily a complete constraint on exchange but is instead

a constraint on the use of money to facilitate trade. For example, while organ donation is legal,

significant legal restrictions exist to bar payments for an organ. While the source of repugnance to

monetary transactions differs across contexts (e.g., while repugnance against organ trading seems to

be grounded in concerns regarding exploitation of potential supplies, repugnance in other areas seems

to be driven by concerns regarding social equality), Roth argues that market designers should simply

identify the constraints arising from repugnance and work around them in the context of considering

alternative allocation mechanisms and rules.

Interestingly, Roth does not analyze the case of ideas and knowledge. However, the un-

priced flow of ideas and knowledge – knowledge spillovers – are a pervasive part of economic

activity and are indeed a crucial building block to modern theories of economic growth (Romer,

1990). In other words, while the inability to place a positive price on some types of transactions may
24

be important in the context of their own application, our understanding of the process by which

economic growth occurs depends heavily on the fact that (at least some) ideas producers have only

limited appropriability over their ideas and are unable to earn their marginal product through an

organized and competitive market for ideas. In the remainder of this section, we raise the hypothesis

that this is not simply a matter of market design but the result of repugnance.

To be clear, our prior analysis suggests that there key properties of ideas limit the ability to

charge a positive price for an idea, such as when an idea has a low cost of user reproducibility.

However, we suggest that it may be possible to distinguish a lack of appropriability from repugnance.

For example, while ineffective appropriability benefits buyers (who certainly benefit from ideas at a

zero price), we also observe that many sellers are averse to the use of monetary price signals to value

ideas and settle exchange opportunities. We certainly acknowledge that the hypothesis of repugnance

requires careful empirical evaluation in future work. However, we also think it is useful, in the spirit

of Roth, to consider the impact and role that repugnance might play in the market for ideas, and

evaluate the potential impact of alternative policies and institutions designed to promote the exchange

of ideas and knowledge in light of the repugnance hypothesis.

We emphasize two aspects of repugnance that seem to characterize exchanges regarding ideas

and knowledge. First, there is a wide body of historical and contemporary evidence that, at least for

some types of ideas such as scientific knowledge, ideas producers explicitly value the dissemination

and future use of that knowledge over the monetization of the idea. Consider the famous words of

Benjamin Franklin, a noted Enlightenment inventor and ideas producer:

… as we enjoy great advantages from the inventions of others, we should be glad of an


opportunity to serve others by any invention of ours; and this we should do freely and
generously. (Franklin, 2003, p.117-118.)
Though expressions of the value of free exchange by suppliers of ideas and knowledge are pervasive

– from scientists to journalists to advocates for diverse religious expression – there are very few

analyses that take on the consequences of such sentiments for the incentives to produce knowledge or

the impact on the design of efficient institutions for the exchange and dissemination of that

knowledge.

Second, it is useful to distinguish repugnance (at least initially) from the simple desire to “pay
25

less” or offer a “discount.” Instead, we observe a bimodal structure to transactions in the ideas market.

On the one hand, some ideas are associated with either bilateral or multilateral exchanges, and there

are significant premiums placed on successful innovations (e.g., potential drug candidates, promising

software algorithms, etc). At the other extreme, there is a wide body of knowledge that is distributed

at a price of exactly zero. There are few transactions that take place at a low but positive price

(particularly for goods that are themselves considered pure “knowledge” or “ideas”). Not simply a

reflection of transaction costs (which would not explain why so much knowledge is simply diffused

for free), we raise the hypothesis that, for the class of ideas where both buyers and sellers believe that

trade is repugnant at any price, the equilibrium that emerges is that only a small number of (very

valuable) ideas will have a high and positive price (and be criticized for that monopolistic pricing)

while a larger number of ideas will effectively be sold at a price of zero.

Sources of repugnance

The origins of repugnance over ideas trading are likely diverse and subtle, and our

examination here is necessarily incomplete; instead, as in our earlier discussions, we highlight what

we think may be the most important drivers of repugnance while fully acknowledging that we are in

no way completing a comprehensive survey. With that disclaimer, we examine three drivers in

particular.

First, as emphasized by Arrow, there appears to be a complicated set of essentially

psychological intrinsic drivers:

It seems to me that that there is a motive for action not taken account of in standard economic
models. It is a motive that operates in a social context and cannot fully be discussed in the
terms standard in “methodological individualism.” I refer to what appears to me to be a
tendency for individuals to exchange information, to engage in gossip at all levels. There is
some form of satisfaction not only in receiving information but also in conveying it. Currently,
this is exemplified by the curious phenomenon of Wikepedia [sic], where individuals spend
time and effort to convey information without pay and without fame. Probably, there is even
an evolutionary basis for this phenomenon, though explanations of social traits (other than
those involving kin) on the basis of natural selection have proved to be difficult. (Arrow, 2008,
p.2)
In other words, disclosure is fundamental to human communication. The dividing line between social

communication and the disclosure of knowledge is often blurry, particularly in the context of

embryonic ideas. An important component of human creativity is the communication of that novelty
26

to others, both in the desire to impress and to share (Amabile, 1983, 1996). Simply put, while

economists have essentially abstracted away from the joy and excitement of discovery in the study of

innovation, discovery and creativity are nonetheless important stimuli that are shared through

communication (requiring disclosure that most theory suggests agents will keep to a minimum).

A second potential driver is grounded in the sociology of collective sharing and gift exchange

(Gouldner, 1960; Iannaccone, 1992).12 While the conditions in which communities establish free

exchange norm are subtle (and we discuss below), it is possible that the willingness of suppliers to

provide ideas and knowledge at a zero price is grounded in their membership within a community in

which they also receive ideas and knowledge at a zero price. Indeed, this form of communal sharing

flips the challenge arising from the low costs of user reproducibility on its head; rather than serving as

a deterrent to an organized market, an entire community acts as both suppliers and demanders, and

enforces an equilibrium norm in which exchange takes place at a zero price. Of course, as we discuss

in more detail below, the precise set-up of institutions supporting communal norms will vary by

context (e.g., the rules governing open science are distinct from the “magician code of conduct”).

However, from a broad market design perspective, this collective (equilibrium) choice to exclude

monetary exchange and other forms of profit manifests itself in the form of repugnance for cash

transactions.

Finally, it is possible that the origin of repugnance might be due to an aversion to complex

contracting over the uses and applications of intangible goods. One of the distinctive properties of

information is that potential buyers may not be able to anticipate precisely how they might use a

particular idea or new technology once it is acquired. Consequently, buyers may be extremely averse

to negotiating contracts (particularly contracts in which they are in an informational disadvantaged

position) about how they might use or exploit an idea once it is exchanged. In such an environment,

potential buyers would have an extreme control-rights preference against paying for an idea in a way

that involved significant ex post monitoring regarding the use of that idea. For example, there would

be significant aversion to contract terms that involved metering of restrictions on the scope of

application. From a market design perspective, an inability to charge a positive price on the use of an

12
This is similar to the emotional commitments described by Frank (1994).
27

idea (even when that may be “efficient” from the perspective of traditional economic theory) can be

interpreted as a repugnance-based constraint on certain types of licensing and intellectual exchange

arrangements.

Transaction Costs versus Repugnance

Before turning to the impact of institutions that seem to account for repugnance in ideas

markets, it is useful to consider whether the lack of exchange of ideas at a positive price is simply the

result of transaction costs. While transaction costs certainly mitigate the ability to viability of certain

types of opportunistic transactions that might involve considerable negotiation (even in the absence of

the types of challenges we described earlier), the dynamics of markets for technology or ideas with

positive prices versus zero prices are strikingly different:

From the consumer’s perspective, though, there is a huge difference between cheap and free.
Give a product away and it can go viral. Charge a single cent for it and you’re in an entirely
different business, one of clawing and scratching for every customer. The psychology of
“free” is powerful indeed, as any marketer will tell you.
This difference between cheap and free is what venture capitalist Josh Kopelman calls the
“penny gap.” People think demand is elastic and that volume falls in a straight line as price
rises, but the truth is that zero is one market and any other price is another. In many cases,
that's the difference between a great market and none at all.
The huge psychological gap between “almost zero” and “zero” is why micropayments failed.
It’s why Google doesn’t show up on your credit card. It’s why modern Web companies don't
charge their users anything. And it's why Yahoo gives away disk drive space. The question of
infinite storage was not if but when. The winners made their stuff free first. (Anderson, 2008)
To an economist, what Anderson is implying is that not only is the cost of information replication

low, but the demand curve for information goods becomes highly elastic at a zero price (and relatively

inelastic at any positive price). In other words, even a very small monetary cost can engender a

dramatic shift in realized demand. While certain types of “micro-payments” have emerged in certain

contexts (e.g., iTunes 99 cents pricing), participants in many ideas transactions seem willing to

negotiate over whether and when knowledge will be exchanged (incurring significant transaction

costs) but there seems to be significant aversion to transactions at low but positive monetary prices. In

other words, even where transaction costs have fallen dramatically (e.g., news delivery), this has not

translated into the emergence of monetary payments.


28

The Design of Markets for Free Ideas

Roth emphasizes that repugnance need not be a fundamental constraint on efficient exchanges

(though of course it does raise some difficult challenges). When Roth confronted repugnance in the

market for kidney donation, he began to design markets that involved exchanges among voluntary

donor pairs, essentially allowing for exchanges across families. Working within the repugnance

constraint, Roth has organized an emerging set of markets for kidney exchange that operate without

monetary payments but do indeed save lives through effective market design.

In the market for ideas, there are a striking number of real-world institutions that are premised

on a price of zero.13 Consider Wikipedia (Tapscott and Williams, 2008; Greenstein and Devereux,

2006). The traditional encyclopedias such as Encyclopedia Britannica involved the solicitation of

articles by leading scholars along with a modest monetary payment, and the encyclopedias themselves

were sold at extremely high margins (e.g., the 1980s-era Encyclopedia Britannica sold for about

$3000 and was produced for a marginal cost of about $300) (Devereux and Greenstein, 2006).

Wikipedia, on the other hand, is organized according to very different principle. Both the provision of

content and the use of the online encyclopedia are not only free but open to debate and interpretation

by the user community. Rather than soliciting articles from leading “experts,” Wikipedia allows any

user to also serve as a contributor and has developed subtle protocols to adjudicate debates when

different user/contributors hold different perspectives. Once an entry or contribution is submitted,

individuals do not even have an absolute right of “control” over their own prior contributions; not

only are there no prices, there are no property rights. Despite this quite idiosyncratic “design” for an

encyclopedia, Wikipedia has quickly emerged as the single most utilized reference source in the

world. In less than a decade, Wikipedia has essentially supplanted the expert-based system with

positive prices that had existed for nearly 200 years. Of course, the reliance on mere users and free

contributors has raised concerns about quality and accuracy; perhaps surprisingly, most independent

tests suggest that the overall rate of error across free, user-based system and expert-based systems

with positive prices (and, along some dimensions, Wikipedia is in fact superior) (Giles, 2005).

13
It is interesting to note that while Roth’s examples usually involve a law or regulation that prohibits monetary
transfers, institutions for free ideas tend to operate according to (strongly enforced) informal norms and
practices.
29

Intriguingly, given the complexity and need for debate and adjudication within the Wikipedia user

and contributor community, the decisive issue for Wikipedia is not a lack of “transaction costs”

(indeed, there are significant transaction costs to make a contribution and understand the information

upon which individual entries are based); instead, the key issue seems to be the complete transparency

of the process by which information is provided, the ability to debate alternative ways of organizing a

particular set of facts, and the ability of the worldwide user community to access that information for

free (Tapscott and Williams, 2008). Put simply, the ‘wiki’ model (which now extends well beyond

Wikipedia) has emerged as a market for free ideas that simultaneously involves significant investment

on the part of ideas contributors but also relies on free exchange.

Whereas Wikipedia is a quite recent phenomena, the development of institutions involving

the free exchange of ideas is, of course, much older, and realized most durably and strikingly in the

context of the Open Science (Merton, 1973; Dasgupta and David, 1994; Stern, 2004; David, 2008).

Open Science is a complex system in which researchers participate within a scientific community by

drawing upon and advancing a specialized field of knowledge by pursuing research directions of their

own interest. The hallmark of this system is the priority-based reward system: to receive credit for

their discoveries, scientists publicize their findings as quickly as possible and retain no formal

intellectual property rights over their ideas (Merton, 1957; Dasgupta and David, 1994). In turn, the

institutions supporting scientific research – from universities to public funding agencies to non-profit

foundations – offer status-based rewards such as tenure and prizes to recognize significant

achievements that are also publicly disclosed. The priority-based reward system not only serves to

provide incentives for scientists, but also provides an system of efficient disclosure that (at least in

principle) minimizes the duplication of research efforts among scientists (assuming that scientists can

access and replicate each other’s work at relatively low cost) and enhances the growth in the stock of

knowledge within the boundaries of particular scientific disciplines (Dasgupta and David, 1994).

While the origins of open science are grounded in a complex set of motives and incentives facing

researchers and funders (David, 2008), the norms of open science have evolved to ensure a high level

of participation (allowing researchers to build on ideas in an unstructured way over time), allow for

multiple researchers to both collaborate and compete with each other in a (relatively) transparent way,
30

and, strikingly, provide status-based rewards to those that can credibly claim to have initially made a

discovery (rather than those that simply learn about it and diffuse it to others). In other words, as a

market design, open science overcomes the challenges arising from ideas complementarity, value

rivalry, and user reproducibility, respectively.14

It is of course feasible to consider a wide range of institutions that support markets for free

ideas, and examine each from the perspective of market design. Without claiming to provide a

comprehensive list, such institutions range from enduring arrangements such as the freedom of the

press and religion, to more contemporary phenomena such as the open source software movement, the

blogosphere, and YouTube. In each case, ideas that are costly to develop are nonetheless offered at

essentially a zero price. One dramatic consequence of a zero price is that, conditional on participation

by ideas suppliers, it is relatively easy to ensure market thickness and to take advantage of the non-

rivalry of ideas among users. Market safety is likely to be more of an issue, particularly when ideas

can be used or manipulated in ways that are adverse to the interests of the ideas supplier. To take but

one example, the ubiquity of video coverage of politicians along with the YouTube platform have

likely made politicians and public intellectuals more reticent and scripted in their public activities, lest

their words be taken out of context or misconstrued by particular viewers or listeners. More generally,

while each of these institutions supports both the production and diffusion of free ideas – ranging

from political rhetoric to well-defined technological innovation – it is striking to us that there has been

little systematic analysis of the institutional requirements for such institutions to exist, the role that

repugnance plays in shaping these institutions, and the contribution of these idiosyncratic and eclectic

institutions to economic and social well-being.

Market Design and the Limits of Repugnance

One of the most striking aspects of repugnant markets is that the constraints on pricing are

rarely comprehensive and often emerge in relatively subtle ways. For example, while there are sharp

14
Indeed, it is precisely the violation of these norms that are at the heart of contemporary policy debates about
the limits of open science when knowledge traditionally maintained within the public domain is also protected
by formal intellectual property protection. As emphasized by Murray (2009) and Murray and Stern (2008),
patents in particular seem to have emerged as an alternative non-monetary “currency” that has been adapted by
the scientific community to promote the underlying norms of the open science system.
31

constraints on organ trading a positive price, there is certainly no expectation that physicians involved

in kidney exchange should operate for free, nor are there constraints on charging for other human

parts such as hair. How do the limitations and nature of repugnance impact the pricing of ideas and

knowledge?

Consider the emergence of online two-sided markets such as Internet search. From a

theoretical perspective, it is possible that, for technologies such as Google web search, the equilibrium

involves (a) consumers paying for web search and access to advertisers, (b) advertisers paying for

access to consumers who are able to search for free and (c) a mixture of payments on both sides of

this technology platform. However, if consumers have a deep aversion to paying for “information,” it

becomes much more likely that the equilibrium will involve free consumer search alongside paid

advertising content. It is useful to compare this model with the pricing of physical newspapers. Even

for a newspaper in which the marginal cost was positive, consumers have traditionally paid a nominal

charge and the bulk of newspaper revenues have been through the advertising channel. In other

words, the existence of repugnance did not necessitate public funding in order to achieve a positive

level of supply; instead, media and advertising have evolved to complement each other in order to

overcome some of the key constraints that would arise if newspapers or other media could only be

accessed at a high price.

Examining markets for ideas that involve significant limitations on the use of those ideas

highlight a second type of nuanced constraint on pricing. For example, while the market for

prerecorded magnetic videotape was by and large served in the form of a rental market (placing

significant time limitations on use, opening up users to the potential for late fees, etc), the pricing of

DVDs and CDs is in the form of a flat fee for unlimited private exploitation.15 More generally,

different technologies and types of knowledge are associated with very different pricing schedules,

and there has been little detailed examination of the conditions under which different arrangements

15
As well, except for media that have been protected by digital rights management software, it is also possible
to share these materials with others in violation of the license agreement imposed on buyers. Indeed, Boldrin
and Levine (2008) suggest that fixed fee pricing with no limitations on use (including resale and replication) can
be optimal. Their analysis captures the idea that if you allow idea buyers to re-sell the idea, you are able to
charge a premium to early buyers and so avoid the costs imposed by the restrictions. When imitation is not
immediate, first-mover advantages may allow ideas sellers to appropriate rents even in the absence of
intellectual property protection. See also Gans and King (2007).
32

are effective, and, in particular, what role repugnance over certain types of monetary transactions

plays in the emergence of different types of pricing structures.

This can be seen perhaps most dramatically in the case of fixed fee versus subscription

services. While some types of information products can be sold through a subscription service (from

newspapers to cable television), attempts to establish subscription services have failed in a wide range

of settings, including software. While most consumers (and particularly business consumers) are fully

aware that upgrades are likely to occur on a regular schedule, and that they are likely to purchase such

upgrades (either as the result of enhanced quality or to ensure interoperability), software companies

such as Microsoft and Intuit have largely failed in their efforts to establish subscription services for

their products. In the absence of repugnance, this is surprising, since the availability of a subscription

service likely reduces the riskiness of expenditures of a potential buyer and most subscription services

have been offered in a way that made them an attractive option for those who were likely to upgrade

anyway (which turns out to be most consumers). However, if buyers have a preference for control

over the decision (even one that likely involves paying a premium ex post), the repugnance associated

with subscription pricing likely undermines the market viability of what would otherwise be an

efficient pricing mechanism.

Taken together, these examples suggest that understanding the form in which repugnance

takes in particular circumstances, and considering how that particular form of repugnance impacts the

broader challenge of designing an effective market for ideas, can deepen our analysis of repugnance.

5. Conclusion

In this paper, we have tried to develop an agenda and framework for understanding the

apparent lack of formal markets for ideas. In so doing we have combined insights from the economic

literature on market design and the literature on markets for technology. We have noted that the latter

has mostly studied bilateral exchange of ideas rather than “markets” as characterized by large

numbers of buyers and sellers engaging on large numbers of transactions. Those markets enable

participants to better evaluate options for combining ideas with each other and with other assets in a
33

timely and stable manner. Consequently, they can both enhance the useful application of ideas and

also harness the force of competition to ensure creators of ideas earn an appropriate return.

Several conclusions emerge from this exercise. First, ideas possess particular characteristics

that make the efficient design of markets challenging. The fact that many ideas require access and

perhaps ownership of other, complementary ideas to be of value makes it difficult to coordinate

transactions so that participants can evaluate their choices over different bundles of ideas. The fact

that, for some ideas, the value of them to a given user falls if other users should have access to them

creates incentives for pre-emptive signing of exclusionary deals. This diminishes the potential for

participants to evaluate options at a given point of time. Finally, the fact that ideas might be easily

reproduced by users or expropriated by them through pre-contractual disclosures, can make sales of

an idea to many buyers unsafe; driving bilateral exchange.

Second, formal intellectual property protection can assist in alleviating these challenges to the

design of efficient markets for ideas. It can make intangible ideas into assets that can be easily traded

and understood. Policy-makers to increase transparency and reduce issues of market congestion can

adjust the terms of disclosures in intellectual property protection. Finally, by protecting against

reproduction and expropriation, intellectual property protection can make idea selling safe.

Third, we have identified idea exchange for money as an activity that can be understood as

being constrained by repugnance. We noted that the resistance to selling certain ideas comes from

sellers as much as buyers and that it also appears to generate a desire for extreme control rights in the

use of ideas. The constraint of repugnance is something we argue that has constrained the

development of markets for ideas (at least with positive prices) but can also assist researchers in

understanding various practices and non-practices in selling ideas.

Finally, because in so many situations and creative communities, the sellers of ideas use

ideas, and gain value from the use of their own ideas by others, the most market-like areas of the

exchange of ideas have occurred precisely where by norms or repugnance, the price of ideas has been

constrained to be zero. In this situation, the lack of monetary flows can itself be seen as a means of

generating market thickness, avoiding congestion, making exchange safe and adhering to repugnance.

We believe that the analysis we have provided and the issues we have identified are critical
34

for the study of idea dissemination and the returns to innovators; in particular, understanding the

efforts of business and government to facilitate these objectives. The details and exploration are,

however, something we leave for future research.


35

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