Intellectual property is an important enabler of innovation. Design rights, patents and other IPR encourage innovators to invest their resources, by offering some security that they - rather than imitators who have borne little risk - will garner the benefits. 

The fact that these rights can be transferred, through licensing or assignment, also means that the processes of creation and invention may be separated from the processes of exploitation, so enabling a division of labour which is potentially beneficial.

For instance, many universities and research institutions are engines of IP creation but often not well established to exploit all the inventions that arise. Conversely, industry may be better positioned to exploit specific ideas but not as well equipped to undertake the initial research.

The tradability of IP also has other benefits. For instance, it may be used in some circumstances as collateral for asset-based loans and other financing, which can be of vital assistance for young companies (e.g., IPO 2013; Mateos-Garcia 2014).

In principle, therefore, a market for intellectual property should create mutual benefit and encourage innovation. And markets do operate moderately well for some types of IP. The trading of some music rights, for instance, is quite well established, and organisations like CopyrightHub have made great strides in smoothing the trading of copyright for smaller buyers and sellers.

However, much IP faces quite different market dynamics. The market for design rights and patents, in particular, usually has very few buyers and relatively few sellers. A substantial proportion – perhaps the majority – of patents filed by university technology transfer offices (TTOs) are never licensed.

Moreover, when a patent is licensed, is it often rare to find more than one bidder for a licence, meaning that pricing is difficult to establish. One could say that these are text-book cases of markets which are both ‘thin’ and ‘illiquid’.

Clearly not every item of unlicensed IP represents lost value or unrealised innovation potential – some is simply not valuable. There are also occasions where innovation may be better enabled by the absence of IP. However, some unlicensed IP undoubtedly does represent lost income to the holder and, more importantly, missed opportunities to innovate.

What causes this market dysfunction?

Patent attorneys, TTOs and other IP specialists will all have their own views about market failure. But five inter-related issues seem to contribute to the problem:

Firstly, the number of participants. Patents in particular often relate to highly specialist applications, relevant to only a handful of organisations. There are relatively few buyers and sellers (although corporate trends towards open innovation could change this). This also makes price setting difficult.

Secondly, spatial issues. In addition to being thin, the specialist markets are often geographically disperse. Doing business across borders is always more difficult.

Thirdly, search costs. Because of the above, finding counterparties with whom to trade is a major effort. Prospective licensors often need exceptionally large & diverse networks that span many sectors; such networks are expensive to maintain (especially if used infrequently) and slow. Time is costly with patents.

Fourthly, asymmetric information. Sellers are often involved in creation of the IP, perhaps over many years. In contrast, the buyer starts from position of ignorance (although may be better informed about applications). This widens the bid-ask spread, particularly when there are differences in opinion regarding technology readiness, comparable products and the development required to take an idea to market.

Fifth, transaction costs. There are often lengthy negotiations over licence terms, with it being not at all uncommon for one party to walk away due to protracted negotiations. One-time deals mean there may be no pre-existing relationship or trust to lubricate the transaction.

In addition, TTOs are typically generalists intermediating between specialists, so communicating the exact nature of the potential benefit is difficult - and often a failure point.

How can we start fixing this?

One good place to start is with information and improved information flow. Invariably, better information enables better markets. And standards for communicating that information digitally make the processes of gathering and disseminating much easier.

For instance, a more uniform way of describing licensable inventions, and harvesting that information digitally, could enable more rapid dissemination and significantly reduced search costs.

A new report published today by the UK Intellectual Property Office, led by Golant Media Ventures, suggests ways to develop just such an 'information ecosystem' for IP markets, including a framework of standards for how information about IP and intangible assets can be shared between participants.

This is a helpful first step, which could directly address the issues mentioned above - but requires the support of a wide range of IP producers, users and intermediates.

Gaining agreement for the adoption of new standards is inevitably a protracted process, but the potential benefits of more efficient IP markets are more innovation, growth and wealth creation.