Prizes and Advance Market Commitments

How prizes and promises to buy future products offer alternatives to patents for encouraging inventions society needs.

Patents are not the only way to reward inventors. Governments and charities have also used prizes and promises to buy future products. These tools can encourage innovation without giving anyone a long monopoly.

Push and pull

Economists divide innovation funding into two types. Push funding pays for research up front, through grants to scientists and laboratories. It supports work that might fail. Pull funding pays for results, rewarding whoever delivers a working solution. Patents are one form of pull, because they reward successful inventions through higher prices. Prizes and purchase commitments are others.

Innovation prizes

Innovation prizes have a long history. In 1714 the British Parliament offered a large reward for a practical way to determine a ship’s longitude at sea. The clockmaker John Harrison spent decades developing accurate marine clocks and eventually received substantial payments. More recently, the Ansari XPRIZE of 10 million dollars was won in 2004 for the first private, reusable crewed spacecraft to reach space twice within two weeks.

Prizes have advantages: the prize-giver only pays for success, and winning ideas can be shared freely. But defining the goal precisely enough is hard, and prizes may not attract enough effort if the reward is small relative to the cost.

Advance market commitments

An advance market commitment is a promise to buy a product, at a set price and quantity, if someone develops it. This guarantees a market in advance. In 2009, several donor governments and the Gates Foundation launched an advance market commitment for pneumococcal vaccines, which protect against a major cause of pneumonia, to help bring them to lower-income countries at affordable prices.

Vaccines for poorer countries

Companies may not invest in vaccines for diseases mainly affecting poor countries, because buyers there cannot pay high prices. If donors promise to buy millions of doses at a fixed price once a vaccine exists, companies know there will be revenue. The promise turns a neglected problem into a business opportunity, while keeping prices affordable.

Thinking prizes could replace patents everywhere

Prizes work well when a goal can be clearly defined in advance. For most everyday innovation, from better phones to new recipes, no one could write a prize rule ahead of time. Prizes and commitments are best seen as useful additions to patents and grants, not replacements.

Key takeaways

Push funding pays for research up front; pull funding rewards results.
Prizes, like the 1714 longitude prize and the Ansari XPRIZE, reward specific achievements.
Advance market commitments promise to buy a product if it is developed.
These tools work best for clearly defined goals, complementing patents and grants.