The international political economy of patent buyouts

The literature on patent buyouts has focused on single-economy settings, where buyouts are welfare improving relative to patents unless there are frictions such as imperfect information or commitment problems. We expand the analysis to a world with two heterogeneous countries featuring different sizes and innovation capacities. Moving to an international setting introduces the tradeoff that buyouts help to reduce monopoly distortion but also eliminate profits from foreign markets. We show that this can rationalize why buyouts are not pursued even in the absence of information and commitment problems, and identify the conditions under which this is harmful to global welfare. Instead, countries in the model rely on a system of global patent protection paired with domestic price subsidies, and only intersovereign transfers can achieve a globally optimal buyout equilibrium. Our results suggest that buyouts are constrained not only by domestic frictions but also by a global public good dimension.