IDEAS home Printed from https://ideas.repec.org/p/crt/wpaper/1610.html
   My bibliography  Save this paper

Patenting vs. Secrecy for Startups and the Trade of Patents as Negotiating Assets

Author

Listed:
  • Andreas Panagopoulos

    (Department of Economics, University of Crete, Greece)

  • In-Uck Park

Abstract

The term “patent paradox” refers to the increased use of patents, despite being perceived as having limited stand-alone value as incentives to innovate (Hall et al., 2012). This phenomenon can be attributed to the array of roles patents may play. One role particularly relevant in this context is their use as bargaining chips by firms who employ many patents bundled into patent portfolios to gain a better hand in licensing negotiations, especially in industries where technology is cumulative (Hall and Ziedonis, 2001). As argued by Lanjouw and Schankerman (2004), patent portfolios endow such uses because patents confer “enforcement spillovers” that allow firms to exploit economies of scale, making it less costly to protect a patent when it is part of a bundle, in which case small firms like startups, that hold few patents, are at a disadvantage. In fact, for startup firms patents may even be a “liability” as they can invite infringement allegations from dominant firms with a portfolio of patents. Fear of evoking such highly costly legal disputes is known to force startups to redirect their research (Lerner, 1995) and may well have contributed to the tendency of startups to prefer trade secrecy over patenting as found in some studies, e.g., Graham et al. (2009). In a world of dominant firms and patent portfolios, is there a role for patents as incentives to innovate for tech-startups, or should these innovative firms, which play an outsized role in US net job creation (Hathaway, 2013), prefer secrecy instead? This is an important question because patents, unlike trade secrets, promote welfare enhancing diffusion and knowledge spillovers. The use of patents as leverage in licensing negotiations stems from ownership contentions that arise due to the inherent difficulty (especially in cumulative innovation) of confining bordering technologies. Due to such contentions, when licensing or trading a patent whose ownership is potentially disputed by the prospective licensee, a startup may not be able to reap the full value of its patented technology because the negotiations take place in the shadow of infringement litigation (Shapiro, 2003). Nevertheless, we argue that trade secrecy may not be the best resort. Instead, we show that overt ownership of technology through patenting, together with appropriate channels for ownership trading, can work better to incentivize startups’ innovation activities. Specifically, we present an equilibrium analysis of a dynamic model that clarifies when and how patents may outperform trade secrets in promoting startup innovations. In the process, we also provide some policy implications. Our main thesis is that when trading a patent its owner is potentially selling more than a monopoly right. Specifically, insofar as patents’ enforcing capacity spills over as mentioned above, when a patent is added to a patent portfolio it enhances the portfolio’s muscle in enforcing the rights of any given patent in the bundle. Such additional leverage correspondingly increases the portfolio’s ability to favourably barter a future technology transfer agreement against potential infringers. Thus, a transfer of patent rights does not only convey monopoly profits on the technology embodied in the patents’ claims (as trade secrets do), but also extra surplus from the patents’ capacity to affect future technology transfer negotiations. Therefore, when an innovator transfers a patent, even though its transfer price may not be able to capture the full monopoly profits (because of the risk of infringement), it may merit a markup reflecting the prospect of such extra future surplus. When a sequence of startups are expected to patent and transfer their technology to an incumbent, gradually increasing its future bargaining power, the dynamic feedback effects on this markup can be large enough so that the patent’s transfer price exceeds the value of a trade secret. In short, since patent portfolios do not only engender the threat

Suggested Citation

  • Andreas Panagopoulos & In-Uck Park, 2016. "Patenting vs. Secrecy for Startups and the Trade of Patents as Negotiating Assets," Working Papers 1610, University of Crete, Department of Economics.
  • Handle: RePEc:crt:wpaper:1610
    as

    Download full text from publisher

    File URL: http://economics.soc.uoc.gr/wpa/docs/1610.pdf
    File Function: First version
    Download Restriction: No
    ---><---

    References listed on IDEAS

    as
    1. Shapiro, Carl, 2003. "Antitrust Limits to Patent Settlements," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 391-411, Summer.
    2. Iain M. Cockburn & Megan J. MacGarvie & Elisabeth Müller, 2010. "Patent thickets, licensing and innovative performance," Industrial and Corporate Change, Oxford University Press, vol. 19(3), pages 899-925, June.
    3. Illoong Kwon, 2012. "Patent Races with Secrecy," Journal of Industrial Economics, Wiley Blackwell, vol. 60(3), pages 499-516, September.
    4. Iain M. Cockburn & Megan J. MacGarvie, 2009. "Patents, Thickets and the Financing of Early‐Stage Firms: Evidence from the Software Industry," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 18(3), pages 729-773, September.
    5. Henry, Emeric & Ruiz-Aliseda, Francisco, 2012. "Innovation Beyond Patents: Technological Complexity as a Protection against Imitation," CEPR Discussion Papers 8870, C.E.P.R. Discussion Papers.
    6. Ashish Arora & Sharon Belenzon & Andrea Patacconi, 2015. "Killing the Golden Goose? The Decline of Science in Corporate R&D," NBER Working Papers 20902, National Bureau of Economic Research, Inc.
    7. Vincenzo Denicolò & Luigi Alberto Franzoni, 2004. "Patents, Secrets, and the First‐Inventor Defense," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(3), pages 517-538, September.
    8. Claude Crampes & Corinne Langinier, 2002. "Litigation and Settlement in Patent Infringement Cases," RAND Journal of Economics, The RAND Corporation, vol. 33(2), pages 258-274, Summer.
    9. Lanjouw, Jean O & Schankerman, Mark, 2004. "Protecting Intellectual Property Rights: Are Small Firms Handicapped?," Journal of Law and Economics, University of Chicago Press, vol. 47(1), pages 45-74, April.
    10. 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 837-858, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Crass, Dirk & Garcia Valero, Francisco & Pitton, Francesco & Rammer, Christian, 2016. "Protecting innovation through patents and trade secrets: Determinants and performance impacts for firms with a single innovation," ZEW Discussion Papers 16-061, ZEW - Leibniz Centre for European Economic Research.
    2. Crass, Dirk & Valero, Francisco Garcia & Pitton, Francesco & Rammer, Christian, 2019. "Protecting Innovation Through Patents and Trade Secrets: Evidence for Firms with a Single Innovation," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, pages 117-156.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Rockett, Katharine, 2010. "Property Rights and Invention," Handbook of the Economics of Innovation, in: Bronwyn H. Hall & Nathan Rosenberg (ed.), Handbook of the Economics of Innovation, edition 1, volume 1, chapter 0, pages 315-380, Elsevier.
    2. Crass, Dirk & Garcia Valero, Francisco & Pitton, Francesco & Rammer, Christian, 2016. "Protecting innovation through patents and trade secrets: Determinants and performance impacts for firms with a single innovation," ZEW Discussion Papers 16-061, ZEW - Leibniz Centre for European Economic Research.
    3. Johnson, Justin P., 2014. "Defensive publishing by a leading firm," Information Economics and Policy, Elsevier, vol. 28(C), pages 15-27.
    4. Paul Belleflamme & Paul Bloch, 2013. "Dynamic Protection of Innovations through Patents and Trade Secrets," CESifo Working Paper Series 4486, CESifo.
    5. Koenen, Johannes & Peitz, Martin, 2015. "Firm reputation and incentives to “milk” pending patents," International Journal of Industrial Organization, Elsevier, vol. 43(C), pages 18-29.
    6. Carlos J Ponce, 2007. "More Secrecy...More Knowledge Disclosure? On Disclosure Outside of Patents," Levine's Working Paper Archive 122247000000001600, David K. Levine.
    7. Lee, Jong-Seon & Kim, Nami & Bae, Zong-Tae, 2019. "The effects of patent litigation involving NPEs on firms’ patent strategies," Technological Forecasting and Social Change, Elsevier, vol. 149(C).
    8. Anne Duchêne & Konstantinos Serfes, 2012. "Patent Settlements as a Barrier to Entry," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 21(2), pages 399-429, June.
    9. Schankerman, Mark & Schütt, Florian, 2016. "Screening for Patent Quality : Examination, Fees, and the Courts," Discussion Paper 2016-046, Tilburg University, Center for Economic Research.
    10. Crass, Dirk & Valero, Francisco Garcia & Pitton, Francesco & Rammer, Christian, 2019. "Protecting Innovation Through Patents and Trade Secrets: Evidence for Firms with a Single Innovation," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, pages 117-156.
    11. Langinier, Corinne & Marcoul, Philippe, 2009. "Contributory infringement rule and patents," Journal of Economic Behavior & Organization, Elsevier, vol. 70(1-2), pages 296-310, May.
    12. Gerard Llobet & Javier Suarez, 2005. "Financing and the Protection of Innovators," Working Papers wp2005_0502, CEMFI.
    13. Henry, Emeric & Ruiz-Aliseda, Francisco, 2012. "Innovation Beyond Patents: Technological Complexity as a Protection against Imitation," CEPR Discussion Papers 8870, C.E.P.R. Discussion Papers.
    14. Anne Duchêne, 2017. "Patent Litigation Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 84(2), pages 631-660, June.
    15. Hong Luo & Julie Holland Mortimer, 2016. "Copyright Enforcement: Evidence from Two Field Experiments," NBER Working Papers 22082, National Bureau of Economic Research, Inc.
    16. Tapan Biswas & Jolian McHardy, 2012. "Secrecy Versus Patents: Process Innovations and the Role of Uncertainty," Working Paper series 18_12, Rimini Centre for Economic Analysis.
    17. Dietmar Harhoff & Georg von Graevenitz & Stefan Wagner, 2016. "Conflict Resolution, Public Goods, and Patent Thickets," Management Science, INFORMS, vol. 62(3), pages 704-721, March.
    18. Jinyoung Kim, 2015. "Patent Portfolio Management of Sequential Inventions: Evidence from US Patent Renewal Data," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(2), pages 195-218, September.
    19. Gaessler, Fabian & Harhoff, Dietmar & Sorg, Stefan, 2019. "Bargaining Failure and Freedom to Operate: Re-evaluating the Effect of Patents on Cumulative Innovation," Rationality and Competition Discussion Paper Series 220, CRC TRR 190 Rationality and Competition.
    20. 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.

    More about this item

    Keywords

    Patents; trade secrets; startups; takeovers;
    All these keywords.

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:crt:wpaper:1610. 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: . General contact details of provider: https://edirc.repec.org/data/deuchgr.html .

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Kostis Pigounakis (email available below). General contact details of provider: https://edirc.repec.org/data/deuchgr.html .

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.