Secrecy Versus Patents: Process Innovations and the Role of Uncertainty
Whilst firms often prefer secrecy to patents and process innovations particularly lend themselves to secrecy, we establish a rationale for process innovators who patent. Using a simple two-period model, we show that under myopic optimisation, the incentive to patent rather than pursue secrecy increases as the probability that the rival firm attaches to it being low-cost falls and as the proportion of the cost reduction due to the innovation, secured by the rival firm in the period after the patent has expired, falls. However, the gain to the innovating firm from patenting rather than secrecy strictly increases if the cost reduction due to the innovation is sufficiently small that the high-cost firm could profitably bluff that it is low-cost. Finally, allowing the low-cost firm the option of using an output signal in such cases, may make the patent strategy more or less attractive relative to the case of myopic optimisation.
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- Arundel, Anthony, 2001. "The relative effectiveness of patents and secrecy for appropriation," Research Policy, Elsevier, vol. 30(4), pages 611-624, April.
- Bonanno, Giacomo & Haworth, Barry, 1998. "Intensity of competition and the choice between product and process innovation," International Journal of Industrial Organization, Elsevier, vol. 16(4), pages 495-510, July.
- 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.
- Klaus Kultti & Tuomas Takalo & Juuso Toikka, 2007. "Secrecy versus patenting," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 22-42, 03.
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