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February 22, 2021
Evaluation, Control, and Mergers
February 22, 2021

Kremer’s patent buyout

Chapter 13 Monopoly: Pg 255 Question 5 Write in Essay Form. Cite any sources used. . For Kremer’s patent buyout proposal (mentioned in the chapter) to work, the government needs to pay a price that’s high enough to encourage pharmaceuti- cal companies to develop new drugs. How can the government find out the right price? Through an auction, of course. In Kremer’s plan, it works roughly like this: The government announces that it will hold an auction the next time that a com- pany invents a powerful anti-AIDS drug. Once the drug has been invented and thoroughly tested, the government holds the auction. Many firms compete in the auction—just like on eBay—and the highest bid wins. Now comes the twist: After the auction ends, a government employee rolls a six-sided die. If it comes up “1,” then the highest bidder gets the patent, it pays off the inventor, and it’s free to charge the monopoly price. If the die comes up “2” through “6,” then the government pays the inventor whatever the highest bid was, and then it tears up the patent. The auction had to be held to figure out how much to pay, but most of the time it’s the government that does the paying. Similarly, most of the time, citizens get to pay the marginal cost for the drug, but one-sixth of all new drugs will still charge the monopoly price. a. In your opinion, would taxpayers be willing to pay for this? b. Using Figure 13.5 to guide your answer, what polygon(s) would these firms’ bid be equal to? c. If the government wins the die roll, what net benefits do consumers get, using Figure 13.5’s polygons as your answer? (Be sure to subtract the cost of the auction!)

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