Menu
Menu
Don’t see a term you’ve been wondering about? Let us know what you’d like us to add.
A standard Advance Market Commitment is a promise to subsidize the future purchase of a large quantity of an innovative product, in advance, if it is invented. In return for the subsidy, firms agree to a long-term price cap for paying customers which is close to marginal cost (i.e. with only a small mark-up). In addition to incentivizing innovation, they are useful for incentivizing firms to produce at large scale (which is important for innovations that can be protected by patents or are difficult to copy because their production involves tacit knowledge).
Market shaping involves using market mechanisms and economic instruments to address market failures. Market shaping involves aligning the commercial incentives for innovation with their social importance including through the use of pull mechanisms that reward outputs and outcomes.
Milestone contracts involve providing payments linked to specific steps towards achieving an innovation. They are useful when firms with promising innovations find it hard to access commercial financing. They are also useful for rewarding firms for making publicly available intermediate innovations that would be useful for multiple firms.
A patent provides an innovator with a temporary monopoly on selling products using their innovation. This rewards innovators that find a market for their innovation. They are useful when the returns to innovation are mainly private and therefore the market is good at prioritizing innovations.
A lump sum payment for a solution to a particular problem. Prizes are useful for rewarding innovators for making publicly available innovations that can easily be copied and therefore do not require further incentives for scale.
Pull mechanisms involve paying for outputs (e.g. new vaccines) and outcomes (e.g. reduced greenhouse gas emissions). Firms are only paid if they deliver a successful innovation. They are particularly useful when we know what innovation we need but do not know who is best placed to deliver it.
Push mechanisms involve paying for inputs (e.g. research grants, reimbursing input costs). Firms are paid whether or not they deliver a successful innovation. They can be useful when we know who is best placed to deliver an innovation. They can also be useful for funding open-ended basic research (when we do not know what innovations we need).
