Patents as options: path-dependency and patent value

Abstract

Despite the growing importance of licence revenue to cash-strapped universities and research institutions, there has been no formal attempt to develop pricing models for patent licences. We recognise that patents are options on the stream of future revenues, and apply option-valuation techniques to determine licence prices. We find that accounting for path-dependency in licence revenue streams generates prices that more nearly approximate observed patent prices. While non-path-dependent prices yield conventional sensitivities to volatility, mean-reversion and returns-growth, path-dependent prices show highly non-linear comparative statics. These results are important both for patent licensees and for licensors seeking to maximise licence revenue.

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