The Economic Valuation of Patents

The Economic Valuation of Patents

Methods and Applications

New Horizons in Intellectual Property series

Edited by Federico Munari and Raffaele Oriani

The Economic Valuation of Patents provides an original and essential analysis of patent valuation, presenting the main methodologies to value patents in different contexts.

Chapter 6: Advanced Valuation Methods: The Real Options Approach

Raffaele Oriani and Luigi Sereno

Subjects: economics and finance, economics of innovation, intellectual property, innovation and technology, economics of innovation, intellectual property


Raffaele Oriani, Luigi Sereno 6.1 INTRODUCTION As seen in Chapter 2, by its nature, a patent is a legal title granting its holder the right to make use of an invention for a limited geographical area and time. Whereas a patent entails a right for its owner, it does not imply obligations to invest further in the underlying innovation. This is an important form of flexibility whose value should be considered in patent valuation. While cost and income approaches are still largely applied to evaluate patents (see Chapter 5), recent attention has been given to the real options approach, which allows us to account for the intrinsic uncertainty and flexibility of patents. The attractiveness of the real options approach is due to the fact that it considers a patent as a contingent claim on the value of another asset, that is, for instance, the present value of the expected cash flows from a new product based on the underlying innovation. Accordingly, patents can be considered analogous to financial options and evaluated applying the methods developed for these securities. The real options approach has the advantage to consider patent characteristics in a more comprehensive way, but its application is still limited by several problems, of which the most important is the difficulty to transfer the methods developed for financial options to patents. The objective of this chapter is to present the real options approach, explain how it can be applied to patents, illustrate the valuation formulas and discuss the limitations. It...

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