When we buy things such as apples or cars or a ticket to a movie, we implicitly understand that the amount we’re paying for those things reflects, in some sense, their value. We also understand that the amount we’re paying can go up or down over time depending on a number of factors such as the supply, the demand, the quality and the like. Businesses also operate under these principles, such as when they order parts, stock up on inventory or set prices for their own products. Indeed, economists have long studied and codified the behavior of valuation and price for all kinds of items and can predict where things will move over time.
When we see the amounts being demanded and paid recently for patents, can we assume they follow these same principles? After all, much like apples and cars, patents are items of personal property that can be created, transferred, sold and otherwise monetized for profit. So when a company spends a million dollars to buy a patent, is it fair to assume that patent was worth the money? Similarly, when a company spends over a billion dollars to buy a portfolio of patents, such as Microsoft recently did in purchasing the bulk of AOL’s patent portfolio, can we conclude that this amount actually reflected their value? The answer is perhaps it was to the one doing the buying.