Patents as Options: Path-Dependency and Patent Value

Enabled by the Bayh-Dole Act (1980), universities license access to innovations protected by US patents. Despite the growing importance of license revenue to cash- strapped land-grant universities that generate a large share of agricultural innovations, there has been no formal attempt to determine an optimal pricing strategy for patent licenses. We recognize that patents are options on the stream of future revenues, and apply option-valuation techniques to determine optimal pricing strategies for university technology o¢ cers. We …nd that path-dependency in license revenue streams creates signi…cant di¤erences in the optimal pricing strategy relative to more standard risk- neutral pricing models, but that path-dependent pricing more nearly approximates ob- served 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 maximize license revenue.