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An economic analysis of trade-secret protection in buyer-seller relationships

Author

Listed:
  • Stefan Bechtold

    (Max Planck Institute for Research on Collective Goods, Bonn)

  • Felix Hoeffler

    (Max Planck Institute for Research on Collective Goods, Bonn)

Abstract

The economic analysis of trade-secret protection has traditionally focused on the interests of companies to conceal information from competitors in order to gain a competitive advantage through trade-secret law. This has neglected cases in which the interest is not in concealing information from competitors, but from trading partners. We investigate the social efficiency effects of trade-secret protection in such cases. Many results from economic theory state that asymmetric information (and therefore also its legal protection) is socially undesirable since it leads to inefficient trade. At the same time, protecting private information might create incentives for socially desirable investments. We model this trade-off in a simple buyer-seller model and find that, indeed, trade-secret protection has ambiguous welfare effects. However, a simple, informationally undemanding rule, conditioning the applicability of legal protection on a minimum investment by the informed party to conceal the information, helps to apply trade-secret protection only when it increases welfare. This rationalizes important features of current legal practice.

Suggested Citation

  • Stefan Bechtold & Felix Hoeffler, 2007. "An economic analysis of trade-secret protection in buyer-seller relationships," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2007_18, Max Planck Institute for Research on Collective Goods.
    • Handle: RePEc:mpg:wpaper:2007_18
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    References listed on IDEAS

    as
    1. David D. Friedman & William M. Landes & Richard A. Posner, 1991. "Some Economics of Trade Secret Law," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 61-72, Winter.
    2. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
    3. Grossman, S J & Hart, O D, 1980. "Disclosure Laws and Takeover Bids," Journal of Finance, American Finance Association, vol. 35(2), pages 323-334, May.
    4. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
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    More about this item

    Keywords

    disclosure of information; hold-up problems; trade secrets;
    All these keywords.

    JEL classification:

    • K2 - Law and Economics - - Regulation and Business Law
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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