| Abstract: |
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. |