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Secrecy versus patents: process innovations and the role of uncertainty

Biswas, T. and McHardy, J. (2012) Secrecy versus patents: process innovations and the role of uncertainty. Working Paper. Department of Economics, University of Sheffield ISSN 1749-8368

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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.

Item Type: Monograph (Working Paper)
Copyright, Publisher and Additional Information: The Sheffield Economics Research Paper (SERP) series offers a forum for the research output of the academic staff and research students of the Department of Economics, University of Sheffield. Papers are reviewed for quality and presentation by a departmental editor. However, the contents and opinions expressed remain the responsibility of the authors. All papers may be downloaded free on the understanding that the contents are preliminary and therefore permission from the author(s) should be sought before they are referenced.
Academic Units: The University of Sheffield > Faculty of Social Sciences (Sheffield) > Department of Economics (Sheffield) > Sheffield Economics Research Papers Series
Depositing User: Miss Anthea Tucker
Date Deposited: 16 Mar 2012 10:34
Last Modified: 08 Feb 2013 17:37
Published Version: http://www.shef.ac.uk/economics/research/serps/yea...
Status: Published
Publisher: Department of Economics, University of Sheffield
Identification Number: 2012006
URI: http://eprints.whiterose.ac.uk/id/eprint/43768

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