Patent Development Due to ‘Real Options’ Pricing

August 31, 2017 Accounting


The essay nucleates the thought of a unvarying system of Patent rating. The essay discusses the ‘option ‘ pricing government under the Black-Scholes theoretical account as an international economic rating based. Parallel to this, the essay analyses the demand for uniformity in the international patent market construction in line with the hazard volatility in unfastened ratings. The essay surmises the impossibleness of any other fiscal rating method to take predomination over the existent options pricing theory, but cautions this by keeping that there can be no individual method for rating. Such is needfully followed by pulling the restrictions to the relevant theoretical account.

PATENT Pricing

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A patent can be slackly defined as a monopoly granted to an discoverer by jurisprudence for a fixed clip period in relation to an innovation, holding advanced character. Such monopoly so becomes an plus to the discoverer as it guarantees exclusivity of production, merchandising, and licencing rights over the invention. This seems as a simple narrative from a jurisprudence background. However, from an economic position the patent has value to the patent holder, merely in footings of its capacity to be converted into relatively increased returns ; the same being an border in production ability.

Cost Accounting [ 1 ] on the other manus introduces another stratum in the patent’s value when it treats the same as an ‘option’ which can be traded on its ain. Such patents can be traded in the signifiers of allowing sole and non-exclusive licences to others, this being an advantage to an discoverer who has small capital or involvement to bring forth the innovation, and to the maker who can gain a monopolistic border from the same.

For all legal purposes and commercial intents ( like litigating, mortgaging, licensing, buying, registering ) the value of the patent to be ascertained is of cardinal importance. There are many ways of valuing patents, as besides is the intent behind their acquisition. As theoretical accounts grow in complexness to account for the true value of a patent, they start handling a patent like a fiscal ‘option’ , akin to portions [ 2 ] .


Among many theoretical accounts of measuring patents, one theoretical account captured the market imagination—Black-Scholes Modelfluctuations. The Black-Scholes theoretical account originally was intended for the exchange of fiscal options ( like Shares ) ; the freshness in its attack was that it enabled determinations on uninterrupted footing at changing price reduction rates, instead than lodging to determinations at discreet points of clip at fixed price reduction rates. The theoretical account besides famously allowed for the volatility of the portion ( option ) monetary value and was handsomely rewarded with a Nobel Prize in 1997.

Variations in the Black-Scholes theoretical account have allowed for a patent’s exchange handling it as a ‘real’ option [ 3 ] . However such theoretical accounts have been criticized as puting a fiscal tendency towards the exchange of the patent, instead than their true rating. Hence the primary concern from a fiscal rating would more frequently than non, limit a patent as an plus of exchange, holding proprietary growing options [ 4 ] in its use.

It was merely with the plants of Trigeorgis that the thought of compound options [ 5 ] emerged which solved the shortcoming. Such was a major up-step among all other signifiers of patent rating [ 6 ] , since it allowed for the first clip to handle a patent as holding multiple options [ 7 ] , unlike portions which had the lone option of buying/ merchandising.


Patents have been described by many as Raffless ; merely few out of many are able to be transformed into something industrially successful. The component of hazard related to buy or mortgaging on such patents have been shown to be a misstatement for uncertainness [ 8 ] .

Enabling such theoretical accounts pricing of patents in the signifier of ‘real options’ [ 9 ] , allows for the being of a true market for patents. When a unvarying rating form leting for hazard and compound accommodations is applied universally, it enables for a confident [ 10 ] and symmetric [ 11 ] exchange of goods.

The possible job of holding an undeveloped market as seen in “Market for Lemons [ 12 ] ” ; is mitigated due to an adequately developed market, which trades on a set market technique. This leaves small range for monetary values, and therefore existent rating, to be projected at terribly aberrant estimations. [ 13 ]


Further Pakes ( 1985 ) utilizing Econometricss had shown that there is a strong correlativity between high stock market value of a house and the Intellectual Property. [ 14 ] This would intend that for a participant ( company ) holding a high stock monetary value, the figure of patents which were successful was higher. It could be a bipartisan deduction:

First, that the success of patents was taking to higher stock monetary values ( obvious ) ; or back, that the high stock monetary values was in fact contributed to patent success. The 2nd limb of the deduction could perchance be justified on the land that since the rating parametric quantities for a patent are the same as that of a portion, the high stock monetary values on those parametric quantities led to the high rating for the patents on the same theoretical account. Since the R & A ; D outgo was besides successful, one can presume that the patents had proficient virtue.


Indeed like any other good or plus, rating may differ by different people and that there can non be any unvarying rating technique ; since even the ‘real options’ pricing theoretical account makes certain premises [ 15 ] about the market behaviour which restricts the range of a absolutely accurate pricing method [ 16 ] . However a base imitating market normalcy is utile for piecing a market for unvarying minutess sing patents. Development of such markets resolves many jobs sing patents which are faced due to inadequately developed market, as enunciated in ‘Market for Lemons’ .


It is at the terminal a win-win state of affairs where fabrication houses can concentrate on production, while R & A ; D houses can concentrate on advanced research. Business theoretical accounts presently successful like Apple Inc. which focuses in-house on R & A ; D on merchandise design, while out-sourcing fabrication to companies like Foxconn is merely one illustration of how investing in patents reaps great success.


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