Thursday, January 29, 2009

Market for ideas

Joshua Gans and Scott Stern sent me a fascinating market design paper called Is there a market for ideas?, which performs some admirable intellectual arbitrage. They seek to combine modern insights on the unusual properties of intellectual property with some of the recent conclusions from market design.

In particular, they take seriously my proposal here that many market failures have to do with a failure to make the market thick, to deal with congestion, or to make it safe to participate in the marketplace, together with the fact that some transactions are regarded as repugnant.

They argue that some of the properties of ideas themselves make it difficult to organize successful markets for ideas along conventional lines: e.g. "...a key property of ideas - the potential for expropriation - limits the potential for market thickness and lack of congestion identified by Roth."

Among the particular examples they discuss of market designs that try to solve these problems and make markets for ideas are the scientific incentive system ("Open Science"), open source efforts such as Wikipedia, and commercial projects such as Ocean Tomo (which runs auctions for IP assets), and Innocentive (which runs a marketplace in which companies can post Challenges in need of solutions).

Here's the abstract:
"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. "

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