IDEAS home Printed from
MyIDEAS: Login to save this article or follow this journal

The decision to patent, cumulative innovation, and optimal policy

  • Erkal, Nisvan

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.

(This abstract was borrowed from another version of this item.)

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 23 (2005)
Issue (Month): 7-8 (September)
Pages: 535-562

in new window

Handle: RePEc:eee:indorg:v:23:y:2005:i:7-8:p:535-562
Contact details of provider: Web page:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Vincenzo Denicolo & Luigi Alberto Franzoni, 2004. "Patents, Secrets, and the First-Inventor Defense," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(3), pages 517-538, 09.
  2. Nancy T. Gallini, 2002. "The Economics of Patents: Lessons from Recent U.S. Patent Reform," Journal of Economic Perspectives, American Economic Association, vol. 16(2), pages 131-154, Spring.
  3. 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, vol. 93(5), pages 837-58, October.
  4. Nancy Gallini & Suzanne Scotchmer, 2003. "Intellectual Property: When is it the Best Incentive System?," Levine's Working Paper Archive 618897000000000532, David K. Levine.
  5. Nancy T. Gallini, 1992. "Patent Policy and Costly Imitation," RAND Journal of Economics, The RAND Corporation, vol. 23(1), pages 52-63, Spring.
  6. Adam B. Jaffe & Josh Lerner & Scott Stern, 2002. "Innovation Policy and the Economy, Volume 2," NBER Books, National Bureau of Economic Research, Inc, number jaff02-1, December.
  7. Gilbert, Richard J & Newbery, David M G, 1982. "Preemptive Patenting and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 72(3), pages 514-26, June.
  8. Priest, George L, 1977. "Cartels and Patent License Arrangements," Journal of Law and Economics, University of Chicago Press, vol. 20(2), pages 309-77, October.
  9. Suzanne Scotchmer, 1991. "Standing on the Shoulders of Giants: Cumulative Research and the Patent Law," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 29-41, Winter.
  10. O'DONOGHUE, Ted & SCOTCHMER, Suzanne & THISSE, Jacques-François, . "Patent breadth, patent life, and the pace of technological progress," CORE Discussion Papers RP 1314, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  11. Richard C. Levin & Alvin K. Klevorick & Richard R. Nelson & Sidney G. Winter, 1988. "Appropriating the Returns from Industrial R&D," Cowles Foundation Discussion Papers 862, Cowles Foundation for Research in Economics, Yale University.
  12. Arundel, Anthony, 2001. "The relative effectiveness of patents and secrecy for appropriation," Research Policy, Elsevier, vol. 30(4), pages 611-624, April.
  13. 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.
  14. Lanjouw, Jean Olson, 1998. "Patent Protection in the Shadow of Infringement: Simulation Estimations of Patent Value," Review of Economic Studies, Wiley Blackwell, vol. 65(4), pages 671-710, October.
  15. Charles I. Jones & John C. Williams, 1998. "Measuring The Social Return To R&D," The Quarterly Journal of Economics, MIT Press, vol. 113(4), pages 1119-1135, November.
  16. Suzanne Scotchmer & Jerry Green, 1990. "Novelty and Disclosure in Patent Law," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 131-146, Spring.
  17. Vincenzo Denicolo, 2002. "Sequential innovation and the patent-antitrust conflict," Oxford Economic Papers, Oxford University Press, vol. 54(4), pages 649-668, October.
  18. 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.
  19. Carl Shapiro, 2004. "Navigating the Patent Thicket: Cross Licenses, Patent Pools and Standard Setting," Levine's Working Paper Archive 122247000000000539, David K. Levine.
  20. Glenn C. Loury, 1976. "Market Structure and Innovation," Discussion Papers 256, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  21. Denicolo, Vincenzo & Zanchettin, Piercarlo, 2002. "How should forward patent protection be provided?," International Journal of Industrial Organization, Elsevier, vol. 20(6), pages 801-827, June.
  22. Kitch, Edmund W, 1977. "The Nature and Function of the Patent System," Journal of Law and Economics, University of Chicago Press, vol. 20(2), pages 265-90, October.
  23. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc.
  24. Lanjouw, Jean O & Schankerman, Mark, 2001. "Characteristics of Patent Litigation: A Window on Competition," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 129-51, Spring.
  25. Howard F. Chang, 1995. "Patent Scope, Antitrust Policy, and Cumulative Innovation," RAND Journal of Economics, The RAND Corporation, vol. 26(1), pages 34-57, Spring.
  26. Mansfield, Edwin, 1985. "How Rapidly Does New Industrial Technology Leak Out?," Journal of Industrial Economics, Wiley Blackwell, vol. 34(2), pages 217-23, December.
  27. Reinganum, Jennifer R., 1982. "Uncertain Innovation and the Persistence of Monopoly," Working Papers 431, California Institute of Technology, Division of the Humanities and Social Sciences.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:indorg:v:23:y:2005:i:7-8:p:535-562. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.