Secrecy Versus Patents: Process Innovations and the Role of Uncertainty

Tapan Biswas and Jolian McHardy

No 2012006, Working Papers from The University of Sheffield, Department of Economics

Abstract: Whilst firms often prefer secrecy to patents and process innovations particu- larly lend themselves to secrecy, we establish a rationale for process innovators who patent. Using a simple two-period model, we show that under myopic op- timisation, 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 pro- portion 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.

Keywords: Cournot duopoly; patenting; secrecy; uncertainty (search for similar items in EconPapers)
JEL-codes: D23 D43 O12 O34 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2012
New Economics Papers: this item is included in nep-ino, nep-ipr, nep-pr~ and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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http://www.shef.ac.uk/economics/research/serps/articles/2012_006.html First version, 2012 (application/pdf)

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Working Paper: Secrecy Versus Patents: Process Innovations and the Role of Uncertainty (2012)
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