The NYT recently published an article, “Netflix Competitors Learn the Power of Teamwork” by Steve Lohr, discussing the prize offered by Netflix for improving upon the algorithm it currently uses for recommending movies to Netflix customers and what came from the contest:

A contest set up by Netflix, which offered a $1 million prize to anyone who could significantly improve its movie recommendation system, ended on Sunday with two teams in a virtual dead heat, and no winner to be declared until September.

But the contest, which began in October 2006, has already produced an impressive legacy. It has shaped careers, spawned at least one start-up company and inspired research papers. It has also changed conventional wisdom about the best way to build the automated systems that increasingly help people make online choices about movies, books, clothing, restaurants, news and other goods and services…

The biggest lesson learned, according to members of the two top teams, was the power of collaboration. It was not a single insight, algorithm or concept that allowed both teams to surpass the goal Netflix … set ... Instead, they say, the formula for success was to bring together people with complementary skills and combine different methods of problem-solving.

Other Prizes

Prizes have been used in the past to induce such discoveries as

The Black Tulip: Sometime around 1672, the city of Haarlem in The Netherlands set a prize of 100,000 guilders to the person who can grow a black tulip.

The Longitude Prize: A reward was offered by the British government through an Act of Parliament in 1714 for a simple and practical method for the precise determination of a ship's longitude. The prize was administered by the Board of Longitude... The main longitude prizes were:

₤10,000 for a method that could determine longitude within 60 nautical miles (111 km)
₤15,000 for a method that could determine longitude within 40 nautical miles (74 km)
₤20,000 for a method that could determine longitude within 30 nautical miles (56 km).

Napoleon’s Prize for Preserved Food: In 1795, the French government offered a prize of 12,000 francs for a method of preserving food for use by the army and navy. Chef Nicolas Appert began experimenting in his workshop at Massy, near Paris, and in 1810 was awarded the prize for his method of packing food in bottles, corking them and submerging them in boiling water to stop spoilage.

The Orteig Prize: In 1919 Raymond Orteig offered a prize of $25,000 for the first nonstop aircraft flight between New York and Paris … At 7.52 AM, May 20th, 1927 a small single-engine aircraft took off from Roosevelt Field, Long Island. 33 ½ hours later, on May 21st, the same aircraft landed at Le Bourget Airport, Paris. At the controls of the Ryan monoplace named Spirit of St Louis, a 25-year-old mail pilot, Captain Charles Lindbergh.

The Ansari X Prize: On October 4, 2004, famed aerospace designer Burt Rutan and financier Paul Allen won $10 million for leading the first private team to build and launch a spacecraft capable of carrying three people to 100 kilometers above the earth's surface, twice within two weeks.

Prizes are also currently running to induce the future innovations such as:

The X PRIZE for Genomics: A $10 million prize purse will be awarded to the first Team that can build a device and use it to sequence 100 human genomes within 10 days or less, with an accuracy of no more than one error in every 100,000 bases sequenced, with sequences accurately covering at least 98% of the genome, and at a recurring cost of no more than $10,000 per genome.

The Progressive Insurance Automotive X PRIZE: A $10 million prize purse will be awarded to teams that win a rigorous long distance stage competition and can exceed 100 MPG equivalent fuel economy (MPGe). On April 7th, 2009, a complete list of all Registered Teams who have been accepted into the competition was announced. The diverse group of teams -- 111 in all -- collectively represents 136 vehicle entries and 14 different fuel sources, from 25 U.S. states and 11 countries. Established automakers, emerging start-ups, universities and inventors are among those represented.

There is another form of prize called an Advance Market Commitment, in which a private or public entity puts up some prize to induce innovators to come up with new inventions that might not otherwise be invented. In particular, AMCs are used to spur innovations, such as vaccines, to help people in developing countries increase their standard of living. Without the AMC there might not otherwise be enough profit potential to make it worhwhile for innovators to spend their resources trying to come up with such solutions.

A Recent Study of Prizes

The MIT Ideas Global Challenge website summarized the findings from a study of prizes, "Inducement Prizes and Innovation":

A recent paper by Liam Brunt (University of Lausanne), Josh Lerner (Harvard) and Tom Nichols (Harvard) which examines a 19th century data set to discern insight into whether prize-awards are a useful mechanism to encourage innovation. The answer seems to be yes.

Some insights:

Metric. The number of contestants the prize competition attracts.

Entry fees. Discourage spurrious entrants.

Money and medals. Used as substitutes, gold medal having largest entrant effect.

Diffusion. Shows drew popular interest, spread of technical knowledge.

Patents. Prize winners much more likely to patent after show than non. Interestingly, doubling of monetary award increases patent activity 6-7 percent in the technical area in the year of the show, while a gold medal has a 33 percent effect.

Lead time. Providing longer lead times to inventors raised the number of entrants.

The paper concludes that, among other things, that the monetary awards covered only about one third of the costs of implements and machinery exhibited. More potent was the exposure from the show and “society’s mark of approval.”

Patents vs. Prizes

So which system is better for inducing new innovation, patents or prizes? Obviously, the answer is "it depends". It depends on what a society is trying to achieve, and what upsides and downsides inventors find more appealing for particular types of projects.

Value/Gain:

For the Prize Offerer: Part of the problem with setting a prize for an invention is that the entity awarding the prize must put an actual number on the prize awarded. If they set a higher prize level, they will have to pay more for the invention, but there will be a greater chance the invention will be discovered. On the other hand, if they set the prize too high, then there could be “too much” innovation activity in the area from a social standpoint, that is, the value of the resources expended by participants trying to win the prize could end up being greater than the social value of having the invention.

For the Inventor: There is theoretically an unlimited upside potential to the owner of a patent, whereas the gain to the inventor for a prize is limited to the size of the award. On the other hand, as noted in the review of “Inducement Prizes and Innovation”, there is often more publicity surrounding the award of a prize, so winners, if not also participants, might benefit from any fame or fortune associated with such media exposure.

Timing:

Patents: Theoretically, inventors may spend an unlimited amount of time pursuing the solution to a specific problem. Albeit, at times “the invention’s time has come,” where there’s more explicit pressure to come up with a solution fast before someone else does.

Prizes: Often have an actual deadline. Even if they don't, by offering compensation for reaching a specific goal, the prize offerer induces inventors to apply more timely efforts toward achieving the goal than they would if they stood to earn a patent rather than a prize.

Collaboration:

Patents: When the goal is to get a patent on an eventuaal solution, then the goal is more often pursued within the confines of a particular organization or across a limited number of organizations (who will ultimately try to commercialize the invention). Under such circumstances, the skill set of the inventors is generally more homogeneous. That is, the team is generally comprised of EITHER scientists OR computer programmers OR businessmen; that is, the team is unlikely to comprise a great mix of people with different perspectives.

Prizes: As seen in the case of the Netflix award, when a group comes together to pursue a prize, they are not the ones who will eventually commercialize the invention, which ends up allowing much greater freedom to the groups that form to try to reach the goal. As such, prizes would probably be particularly successful when outside-the-box thinking or collaboration across inventors with different backgrounds is more likely to achieve the goal.