Patenting in the Shadow of Independent Discoveries by Rivals

Zhang, Tianle (2009): Patenting in the Shadow of Independent Discoveries by Rivals. Forthcoming in: International Journal of Industrial Organization

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Patenting decisions; Patents; Secrecy; Independent discoveries
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O34 - Intellectual Property and Intellectual Capital; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O31 - Innovation and Invention: Processes and Incentives

References

Allison, J. and Lemley, M., "Empirical analysis of the validity of litigated patents", American Intellectual Property Law Association Quarterly Journal, 26(3):185-275, (1998).

Anton, J. and Yao, D., "Little patents and big secrets: managing intellectual property", RAND Journal of Economics, 35, 1-22, (2004).

Chen, Y. and Sappington, D., "Innovation in vertically related markets", Journal of Industrial Economics, 58, 373-401 (2010).

Choi, J., "Market structure, incentive to patent and the pace of innovation", Economics Letters, 34, 277-283, (1990).

Choi, J., "Patenting litigation as an information transmission mechanism", American Economic Review, 88, 1249-1263. (1998).

Cohen, W., Nelson, R., and Walsh, J., "Protecting their intellectual assets: appropriability conditions and why U.S. manufacturing firms patent (or not)", NBER working paper W7552. (2000).

Denicolò, V. and Franzoni, L., "Patenting, secrets, and the first-inventor defense", Journal of Economics and Management Strategy, 13, 517-538, (2004).

Denicolò, V. and Franzoni, L., "The contract theory of patents", International Review of Law and Economics, 23, 365--380, (2004).

Denicolò, V. and Franzoni, L., "On the winner-take-all principle in innovation races", Journal of the European Economic Association, 8(5), 1133--1158, (2010).

Erkal, N., "The decision to patent, cumulative innovation, and optimal policy" International Journal of Industrial Organization, 23, 535-562, (2005).

Erkal, N. and Scotchmer, S., "Scarcity of ideas and R&D options: use it, lose it or bank it", NBER Working Paper No. 14940. (2009).

Gallini, T., "Patent policy and costly imitation", RAND Journal of Economics, 23 (1):52-63, (1992).

Green, J. and Scotchmer, S., "On the division of profit in sequential innovation", Rand Journal of Economics, 26, 20-33, (1995).

Horstmann, I., MacDonald, G., and Slivinski, A., "Patents as information transfer mechanisms: to patent or (maybe) not to patent", Journal of Political Economy, Vol, 93. 837-58. (1985).

Kultti, K., Takalo, T., and Toikka, J., "Simultaneous model of innovation, secrecy, and patent policy", American Economic Review, 96, 82-86 (2006).

Kultti, K., Takalo, T., and Toikka, J., "Secrecy versus patenting", RAND Journal of Economics, 38, 22-42.(2007).

La Manna, M., MacLeod, R., and de Meza, D., "The case for permissive patents", European Economic Review, 33, 1427-1443 (1989).

Lemley, M. and Shapiro, C., "Probabilistic patents", Journal of Economic Perspectives, 19, 75-98.(2005).

Levin, R., Klevorick, R., Nelson, R., and Winter, S., "Appropriating the returns from industrial research and development", Brookings Papers on Economic Activity, 3, 783-820.(1987).

Loury, G., "Market structure and innovation", Quarterly Journal of Economics, 93, 395-410 (1979).

Marshall, E., "The patent game: raising the ante", Science 253: 20-24 (1991).

Mansfield, E., "Patents and innovation: An empirical study", Management Science, 32(2):173-181, (1986).

Merges, R. and Duffy, J., Patent Law and Policy: Cases and Materials, LexisNexis, (2007).

Pakes, A. and Griliches, Z., "Patents and R&D at the firm level: A first look", Economics Letters, 5, no 4, 377-81. (1980).

Reinganum, J., "The timing of innovation: research, development, and diffusion", Handbook of Industrial Organization, Vol. 1, R. Schmalensee and R.D. Willig eds.(1989).

Scherer, F., "Firm size, market structure, opportunity, and the output of patented inventions", American Economic Review, 55, 1097-1125. (1965).

Scotchmer, S., Innovation and Incentives. The MIT Press, (2004).

Shapiro, C., "Prior user rights", American Economics Review, 96, 92-96, (2006).

Shapiro, C., "Patent reform: Aligning reward and contribution", NBER working papers, National Bureau of Economic Research, Inc, May (2007).

Varian, H., Farrell, J. and Shapiro, C., The Economics of Information Technology: An Introduction. Cambridge University Press, (2005).