In todays knowledge-based economy, the patent has a central role.

As
a form of intellectual property, it grants its inventor the right to
exclude others from making, using, offering for sale, or selling the
invention (35 USC 154, ) and traditionally has been a central legal
tool in the enforcement of property lights. In recent years, however,
patents have not been treated solely as legal rights; instead they have
gained popularity as financial assets. As early as 2005 it was estimated
that patents and other intangibles such as trade secrets, copyrights, and
trademarks contributed up to 75 percent of the value of publicly traded
American companies, a significant jump from decades past (A
Market for Ideas. 2005). In light of this newfound importance, a
patent market has emerged in which patents can be disconnected from
their inventor and assigned to another owner. There has been a stunning
increase in the number of patent transactions over the past three
decades.

The growth of this market has outpaced improvements in the valuation
of patents, a crucial part of the patent transactions process. Studies
have considered the possibility of predicting patent value through
patent indicators, such as citations and claims, and research over the
past two decades has shown some of these to be significantly correlated
with value. Given that the indicators needed to estimate the value of a
patent are public and easily accessible, this valuation approach has
clear advantages over the traditional methods, requiring less time and
incurring minimal costs (Omland 2011). However, these relationships
have not been clearly quantified, due to the lack of publicly available
patent price data. Instead, the majority of findings have been based in
theory, as research has resorted to indirect measures, such as a firms
market value, responses from inventors surveys, and patent renewal
data to estimate patent value (Munari and Oriani 2011).

The following studies provide a good foundation, but their results as a
whole are not cohesive, even though all three studies use the same
dataset. Sneed and Johnson (2009) establish technological scope,
international filings, references, backward citations, claims, age, owner,
and lot size for sale to be statistically significant predictors of price, but
Odasso and Ughetto (2010) find only the lot size for sale, forward
citations, and age to be statistically significant. Furthermore, Nair et al.
(2011) show only forward citations, age, and international filings to be
significantly correlated with price. Perhaps most alarming, their
research does not agree on the direction of the relationships, as one
study finds international filings to be inversely correlated to price,
while the others suggest a positive correlation. One reason for this
inconsistency may be the differing choices of instruments the studies
use to account for the sample selection problem caused by a form of
omitted variable bias. In this specific case, a valid instrument would be
correlated with the probability of sale but have no influence on the
price of the patent. It seems that no such instrument has been credibly
established. This is a troubling result, as it is known that using an
invalid instrument may exacerbate the bias and inconsistency of the
estimates (Achen 1986).
In contrast, this study establishes an alternative model for valuation, the
censored regression model, which does not require instrumentation and
will provide more precise estimates of the coefficients on each
indicator.

Data
This study used the latest version of the Ocean Tomo dataset of U.S.
patents, which details patents offered for sale in live auctions from
2006 to 2009. Each patent corresponds to a unique identification
number, which I use to combine patent prices and indicators. From this
dataset I select my measures of patent value to be the price of the patent
(price) and the sellers reserve value (open). Of the 1,628 patents I was
able to acquire complete data for, 515 were sold and therefore had
observations for their price. For the remaining unsold patents, the
sellers reserve value was available. Both price and open are right
skewed, and there are a wide range of dollar values, so in the following
analysis, I work with the logarithms of variables measured in dollar
values . The patents offered for sale in the Ocean Tomo auctions seem
to provide a relatively good representation of patents as a whole; they
were diverse in technology and numerous in all nine auctions.
As for my indicators, I select the same indicators used by the previous
authors, provided two criteria. First, the data must be easily accessible
on the US Patent and Trademark Office (USPTO) website. Variations
of indicators have been examined in theory, but I restrict my analysis to
only those that are not derived from the bibliographic indicators.
Second, the indicators must be pertinent to the patent value. That is, in
considering that patents are most often traded to break market barriers
to entry or to guard against lawsuits, the indicators should reflect some
measure of the specificity and relevance of the coverage technology or
the legal coverage of the patent.
From the USPTO I found data on the number of references (the
citations received: ref), the number of citations (the citations made: cit),
the number of claims (claims), the number of included International
Patent Classification (IPC) categories (scope), the number of foreign
patent documents (inter), and whether the patent was invented by an
individual or not (individ). The majority of these patent indicators were
previously quantified in the National Bureau of Economic Researchs
(NBER) U.S. Patent Citations Data File (Hall et al. 2001), which has
been updated up to 2006. Because some patents in the Ocean Tomo
dataset were granted following 2006, the missing data for several
patents were found on the USPTO website. I construct a final term
inspired by the previous studies, the age of the patent (age), by
subtracting the application date from the sale date. I chose not to
construct age based on the grant date because a patents 20-year
lifespan begins upon application, and there is often a lag period
between the application and grant date. Summary statistics are
included in the Appendix as Table 3. The following table describes
what the specific indicators represent, based on theory.

I also decided that I would augment my regressions with the following
control variables: the number of patents within the lot (lotsize),
technology class (techclass) and an auction tag corresponding to the
auction at which the patent was offered for sale (auction). Although
Odasso and Ughetto (2010) were the first to use measures for year and
technology type, they do so only as instruments in the selection stage of
their model. I chose to include those in the valuation stage because it
seems likely that the state of the market over time and whether or not
the patent is in an industry requiring patent protection would influence
price. For the technology classification, I used the NBERs
classification system, which categorizes the technologies into six main
groups: Chemical (excluding Drugs), Computers and Communications,
Drugs and Medical, Electrical and Electronics, Mechanical, and Others.

Methodology
At first glance, the Ocean Tomo dataset seemed quite large, but a closer
look revealed a possibly confounding issue: the 1,628 patents were
offered in 634 lots, so not all patents were offered singularly; in fact,
only 377 lots correspond to the offering of a singular patent. As a
result, the specific price for most patents is uncertain, since the price of
a lot corresponds to the combined value of all the patents within a lot.
Previous studies that have used the Ocean Tomo dataset have
considered two methods to deal with this concern. Sneed and Johnson
(2009) and Odasso and Ughetto (2010) study the patent indicators at
the lot level, taking the average of all indicators, while Nair et al.
(2011) restrict their analysis to only those patents sold singularly. In
order to understand the differences between the results found from the
models without introducing other variables, I test both of these two
approaches of lot-level averaging and restricting to only singular
patents.

While the previous papers have treated the Ocean Tomo dataset as
having a sample selection bias problem resulting from unobservable
patent prices, I argue that the price data are not entirely unobserved but
rather censored. Ocean Tomo auctions were conducted according to
an ascending bid model, and a contract for the sale of the patent is
formed by the highest bid made above the sellers reserve and before
the fall of the auctioneers hammer (Odasso and Ughetto 2010). This
means that if a patent was sold, the price must have been higher than
the reserve, and if unsold, then the reserve was not met, suggesting that
the price of the patent was lower than the reserve price. Mechanically,
by combining these two variables into one variable and accounting for
the observations that are censored, we have a left-censored dependent
variable. This results in 515 uncensored observations and 1013
censored observations in this dataset. To account for the censored data,
I use the Tobit model, which establishes a set upper or lower censoring
points.
Having elucidated the estimation method, I now propose the following
base model, which I estimate first with OLS and then with this
censored model, subsequently adding in controls:
(1) logpricei = refi*1 + agei*2 + citi*4 + claimsi*5 + scopei*6
+ interi*7 +
individi*8 + controls* + i
where i indexes each individual patent or lot, are the coefficients, and
i is the error term. The terms are explained in Table 1.

Hypotheses
In terms of the coefficients, I hypothesize that references will have a
positive coefficient, as the previous studies have shown. An additional
reference should suggest relevance, and thus interest in that specific
patent. Age will have a negative correlation with price, given that the
older a patent, the less time it has before expiration, and thus less time
to generate value for the owner. I expect citations to have a positive
coefficient, since a patent that cites many other patents is demonstrating
its relevance. It is possible, however, that this measure is highly
subjective, due to the fact that patent examiners often add new citations
to an application. The relationship between technological scope and
price seems less obvious. Because of the number of IPC categories in
which a patent provides no legal power, I surmise there will no be
strong correlation with price. Although a study has suggested
otherwise, I expect claims and international filings to have substantial,
positive coefficients, given that they represent the legal power of the
patent. It is true that international filings require additional upkeep, but
it seems reasonable to think that only patents that are worthwhile will
be filed in other countries. It is hard to say how having an individual
inventor affects price. Omland (2011) suggests that multiple inventors
are linked with higher amounts of R&D investment, so I posit that
individual inventor has a negative coefficient.

Results
The results from the censored regressions are reported in Table 2 and
3. In both cases, I first estimate a base model of the indicators, before
adding additional auction and technology class controls. In the lot-level
averaged data, I was also able to include the term lotsize to estimate the
impact of being sold in a group.
For the lot-level averaged data (Table 2), the base regression in column
1 shows that the number of references and having an individual
inventor are positive, significant predictors of patent value.
Surprisingly, having an individual inventor initially seems to represent
a 42.2% increase in value over having an organization or group
inventor. However, once the controls are added, all indicators except
for references are insignificant (age was significant and negative, as
predicted, but only at the 10% level). Additionally, the two terms
representing legal power, claims and international filings are
insignificant. The results of the singular patent regressions (Table 3)
are very similar. The coefficient on references is significant at the 1
percent level, while the rest of the indicators are insignificant. The
magnitude of the references coefficient matches that of the lot-level
regressions (.008), suggesting that for each additional reference, a
patent is worth 0.8 percent more in value.
Analysis of the controls yields more interesting results, as the auction,
technology class, and lot size controls are strongly significant at the 1
percent level. The continuous auction term, as seen in column 2 of
Table 2, has a coefficient of 0.131, representing a 13.1 percent increase
in value per auction from Spring 2006 to Spring 2009. A closer look at
this trend with the significant auction dummies, however, suggests that
this trend was more nuanced. Fall 2006 is only significant at the 10
percent level, showing little difference in the price level from Spring
2006. Additionally, there are substantial, highly significant declines in
Fall 2008 and Spring 2009 from the previous auctions. It is of note that
in Spring 2009, only 21 patent lots were sold. This may explain the
difference in the coefficient as estimated by the censored regression
and the OLS regression, which is unable to take into consideration the
sellers reserve. As for the technology class, the results show that
coefficients for Computers and Communications, Electronics, and
Mechanical are positive and significant at the 1 percent level, while
Drugs and Medical and Others were not. This suggests that patents in
the classes of Computers and Communications, Electronics, and
Mechanical were positively correlated with prices and worth more than
the base dummy, Chemical. Again, the singular patent regressions
show similar results. Lastly, the term lotsize is significant and negative,
representing around a 20 percent decrease in price per additional patent
within a group.
Previous literature claimed that several indicators are indeed good
predictors of patent price, but the results of this study suggest a murkier
picture, since all of the indicators except for references show
insignificant coefficients. This study confirms the previous findings
that references have a positive, significant correlation with patent price.
This study finds a marginal effect of 0.8 percent, whereas the results of
Sneed and Johnson (2009) show a less positive relationship, estimating
it to be 0.2 percent. It also confirms that patents sold in groups seem to
be of less value than those sold singularly because the term lotsize has a
negative coefficient. While this study hoped to contribute to the
understanding of the relationship between international filings and
price, international filings is shown to be an insignificant indicator in
this study. Although the base regressions in this study show that some
indicators were significant, the controlled regressions indicate
otherwise. Thus, based on this analysis, I conclude that these other
indicators are not suitable predictors of price.
There are several reasons why the results of this study differ from
previous literature, namely the use of the censored regression model as
previously described. Additionally, previous researchers did not use the
same control variables for their models, and this might explain the
differences. From our regressions, however, the auction and technology
class controls are valid and are significantly correlated with price.
When added to the regressions, they account for significant jumps in
the Wald chi-squared statistic of the maximum likelihood model, which
is essentially the F-statistic used in OLS regressions; this suggests an
improvement on the model.

Although the results are inconclusive with regards to the power of
indicators to predict patent prices, this study improves the current
understanding of the patent market, specifically through the control
variables. From the time period of this analysis, 2006 to 2009, it seems
the patent price level was increasing. The coefficient from the lot-level
regression does not represent a years difference but only several
months, suggesting that the growth was extremely rapid. One possible
explanation for this would be that the patent market was gaining
popularity. At the same time, the auction dummy variables showed that
the Fall 2008 and Spring 2009 auctions resulted in much lower prices,
canceling out much of the increase in patent price level. It is possible
this decline was the result of the recent global financial crisis, which
significantly worsened in late 2008 and early 2009. It seems that more
than ever, patents indeed are treated as financial assets that are closely
tied to the status of the current economy.

Additionally, the differing significance among the technology class
dummies suggest that patents may play a bigger role in some industries
than others. Patent transactions have not grown at the same pace in all
industries. Based on the regression results, it seems that patent
transactions play a big part in the high-tech industries but are not as
important in the medical field. One explanation for this requires
understanding the standard business model of each industry. While
companies in computers and electronics often go through incremental
improvements, thus generating a large number of patents, companies in
biotechnology or pharmaceuticals have the majority of their value tied
up with single novel drugs and treatments. If these types of companies
were to trade their patents, their business could be significantly
damaged.

Conclusion
Research on patent valuation through indicators suffers from the lack of
publicly available pricing data. Although this paper is unable to make
significant conclusions about the nature of the relationships between
indicators and patent value, it still contributes a key insight: the use of a
censored regression, which maximizes the information from the limited
existing data. Even with the current confusion in this area of research,
the growth in the patent transactions market makes continued study
particularly intriguing.