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The Decision to Patent, Cumulative Innovation,and Optimal Policy

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  • Nisvan Erkal

Abstract

Optimal patent breadth is an issue that is still being vigorously debated at both the theoretical and empirical levels. This paper analyzes optimal patent policy in the context of cumulative innovation in a model that endogenizes the patenting decisions of early innovators. In the theoretical literature on cumulative innovation, it is generally assumed that all innovations are patented. However, studies such as Cohen et al. (2000) and Levin et al. (1987) report that firms frequently rely on secrecy to protect their discoveries. Cumulative innovation implies that innovators may have significant incentives to keep their innovations secret to get a head start in subsequent R&D races. This paper shows that if innovators cannot rely on secrecy to protect their innovations, it is optimal to have relatively narrow patent protection. This happens if the government has a weak trade secret policy or if innovators cannot monitor the flow of their technological information. This is because when innovators cannot rely on secrecy to protect their innovations, they have increased incentives to patent them and it is not necessary for the government to give them extra incentives to patent. In the case when innovators always prefer secrecy over patenting, it becomes optimal to have a flexible antitrust policy rather than a flexible patent policy. Since non-disclosure reduces the investment incentives in the second R&D race, allowing collusive licensing agreements between competing innovators becomes optimal in order to stimulate investment in the second R&D race.

Suggested Citation

  • Nisvan Erkal, 2003. "The Decision to Patent, Cumulative Innovation,and Optimal Policy," Department of Economics - Working Papers Series 877, The University of Melbourne.
  • Handle: RePEc:mlb:wpaper:877
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    Cited by:

    1. Alexandra Zaby, 2010. "Losing the lead: the patenting decision in the light of the disclosure requirement," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 19(2), pages 147-164.
    2. Scotchmer, Suzanne & Erkal, Nisvan, 2009. "Scarcity of Ideas and R&D Options: Use it, Lose it or Bank it," Department of Economics, Working Paper Series qt1295k6gg, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    3. de Rassenfosse, Gaétan, 2013. "Do firms face a trade-off between the quantity and the quality of their inventions?," Research Policy, Elsevier, vol. 42(5), pages 1072-1079.
    4. Erkal, Nisvan & Scotchmer, Suzanne, 2007. "Scarcity of Ideas and Options to Invest in R&D," Department of Economics, Working Paper Series qt2hq9s5kg, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    5. Gans, Joshua S. & Murray, Fiona E. & Stern, Scott, 2017. "Contracting over the disclosure of scientific knowledge: Intellectual property and academic publication," Research Policy, Elsevier, vol. 46(4), pages 820-835.
    6. Jürgen Mihm & Fabian J. Sting & Tan Wang, 2015. "On the Effectiveness of Patenting Strategies in Innovation Races," Management Science, INFORMS, vol. 61(11), pages 2662-2684, November.
    7. Zaby, Alexandra, 2020. "Safe harbors for patent infringers: sequential innovation under incomplete patent protection," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224653, Verein für Socialpolitik / German Economic Association.
    8. Yiannaka, Amalia & Fulton, Murray E., 2006. "Getting Away With Robbery? Patenting Behavior With The Threat Of Infringement," 2006 Conference (50th), February 8-10, 2006, Sydney, Australia 139933, Australian Agricultural and Resource Economics Society.
    9. Zhang, Tianle, 2012. "Patenting in the shadow of independent discoveries by rivals," International Journal of Industrial Organization, Elsevier, vol. 30(1), pages 41-49.
    10. ICHIDA Toshihiro, 2013. "Imitation versus Innovation Costs: Patent policies under common patent length," Discussion papers 13054, Research Institute of Economy, Trade and Industry (RIETI).
    11. Sim, Kyoungbo, 2021. "Optimal use of patents and trade secrets for complex innovations," International Journal of Industrial Organization, Elsevier, vol. 79(C).
    12. Bronwyn Hall & Christian Helmers & Mark Rogers & Vania Sena, 2014. "The Choice between Formal and Informal Intellectual Property: A Review," Journal of Economic Literature, American Economic Association, vol. 52(2), pages 375-423, June.
    13. Sudipto Bhattacharya & Claude d’Aspremont & Sergei Guriev & Debapriya Sen & Yair Tauman, 2014. "Cooperation in R&D: Patenting, Licensing, and Contracting," International Series in Operations Research & Management Science, in: Kalyan Chatterjee & William Samuelson (ed.), Game Theory and Business Applications, edition 2, chapter 0, pages 265-286, Springer.
    14. Aoki, Reiko & Spiegel, Yossi, 2009. "Pre-grant patent publication and cumulative innovation," International Journal of Industrial Organization, Elsevier, vol. 27(3), pages 333-345, May.
    15. Yair Tauman & Debrapiya Sen, 2012. "Patents and Licenses," Department of Economics Working Papers 12-05, Stony Brook University, Department of Economics.
    16. Reinan Ribeiro & David Turchick, 2014. "Optimal patent breadth in a horizontal innovation growth model," Working Papers, Department of Economics 2014_15, University of São Paulo (FEA-USP).
    17. Heger, Diana & Zaby, Alexandra K., 2012. "Giving away the game? The impact of the disclosure effect on the patenting decision," ZEW Discussion Papers 12-010, ZEW - Leibniz Centre for European Economic Research.
    18. Amalia Yiannaka & Murray Fulton, 2011. "Getting Away with Robbery? Patenting Behavior with the Threat of Infringement," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(2), pages 625-648, June.

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    More about this item

    Keywords

    cumulative innovation; patenting decision; patent policy; antitrust policy;
    All these keywords.

    JEL classification:

    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

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