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Patenting in the Shadow of Independent Discoveries by Rivals

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  • Zhang, Tianle

Abstract

This paper studies the decision of whether to apply for a patent in a dynamic model in which firms innovate stochastically and independently. In the model, a firm can choose between patenting and maintaining secrecy to protect a successful innovation. I consider a legal environment characterized by imperfect patent protection and no prior user rights. Thus, patenting grants probabilistic protection, and secrecy is effectively maintained until rivals innovate. I show that (1) firms that innovate early are more inclined to choose secrecy, whereas firms that innovate late have a stronger tendency to patent; (2) the incentives to patent increase with the innovation arrival rate; and (3) an increase in the number of firms may cause patenting to occur earlier or later, depending on the strength of patent protection. The socially optimal level of patent protection, which balances the trade-off between the provision of patenting incentives and the avoidance of deadweight loss caused by a monopoly, is lower with a higher innovation arrival rate or a larger number of firms.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 32917.

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Date of creation: 2009
Date of revision: 2011
Handle: RePEc:pra:mprapa:32917

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Keywords: Patenting decisions; Patents; Secrecy; Independent discoveries;

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References

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  1. James J. Anton & Dennis A. Yao, 2004. "Little Patents and Big Secrets: Managing Intellectual Property," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 1-22, Spring.
  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, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt1295k6gg, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  3. Pil Choi, Jay, 1990. "Market structure, incentive to patent and the pace of innovation," Economics Letters, Elsevier, Elsevier, vol. 34(3), pages 277-283, November.
  4. Klaus Kultti & Tuomas Takalo & Juuso Toikka, 2007. "Secrecy versus patenting," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 22-42, 03.
  5. Wesley M. Cohen & Richard R. Nelson & John P. Walsh, 2000. "Protecting Their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or Not)," NBER Working Papers 7552, National Bureau of Economic Research, Inc.
  6. Reinganum, Jennifer F., 1989. "The timing of innovation: Research, development, and diffusion," Handbook of Industrial Organization, Elsevier, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 14, pages 849-908 Elsevier.
  7. Choi, J.P., 1997. "Patent Litigation as an Information Transmission Mechanism," Discussion Paper, Tilburg University, Center for Economic Research 1997-17, Tilburg University, Center for Economic Research.
  8. Klaus Kultti & Tuomas Takalo & Juuso Toikka, 2006. "Simultaneous Model of Innovation, Secrecy, and Patent Policy," American Economic Review, American Economic Association, American Economic Association, vol. 96(2), pages 82-86, May.
  9. Carl Shapiro, 2006. "Prior User Rights," American Economic Review, American Economic Association, American Economic Association, vol. 96(2), pages 92-96, May.
  10. Carl Shapiro, 2008. "Patent Reform: Aligning Reward and Contribution," NBER Chapters, in: Innovation Policy and the Economy, Volume 8, pages 111-156 National Bureau of Economic Research, Inc.
  11. Mark A. Lemley & Carl Shapiro, 2005. "Probabilistic Patents," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 19(2), pages 75-98, Spring.
  12. Glenn C. Loury, 1976. "Market Structure and Innovation," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 256, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  13. Ariel Pakes & Zvi Griliches, 1980. "Patents and R and D at the Firm Level: A First Look," NBER Working Papers 0561, National Bureau of Economic Research, Inc.
  14. Erkal, Nisvan, 2005. "The decision to patent, cumulative innovation, and optimal policy," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 23(7-8), pages 535-562, September.
  15. Vincenzo Denicolo & Luigi Alberto Franzoni, 2004. "Patents, Secrets, and the First-Inventor Defense," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 13(3), pages 517-538, 09.
  16. Yongmin Chen & David E. M. Sappington, 2010. "INNOVATION IN VERTICALLY RELATED MARKETS -super-* ," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 58(2), pages 373-401, 06.
  17. Vincenzo Denicolo & Luigi A. Franzoni, 2010. "On the Winner-Take-All Principle in Innovation Races," Journal of the European Economic Association, MIT Press, MIT Press, vol. 8(5), pages 1133-1158, 09.
  18. La Manna, Manfredi & Macleod, Ross & de Meza, David, 1989. "The case for permissive patents," European Economic Review, Elsevier, Elsevier, vol. 33(7), pages 1427-1443, September.
  19. Edwin Mansfield, 1986. "Patents and Innovation: An Empirical Study," Management Science, INFORMS, INFORMS, vol. 32(2), pages 173-181, February.
  20. Nancy T. Gallini, 1992. "Patent Policy and Costly Imitation," RAND Journal of Economics, The RAND Corporation, vol. 23(1), pages 52-63, Spring.
  21. Horstmann, Ignatius & MacDonald, Glenn M & Slivinski, Alan, 1985. "Patents as Information Transfer Mechanisms: To Patent or (Maybe) Not to Patent," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(5), pages 837-58, October.
  22. Richard C. Levin & Alvin K. Klevorick & Richard R. Nelson & Sidney G. Winter, 1987. "Appropriating the Returns from Industrial Research and Development," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(3), pages 783-832.
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