The Language of Trust: Four Strategies of Self-Restraint in Patent Markets

Firms exchanging technology using the patent system as a trade system (through licensing, cross-licensing, transfer, and other mechanisms) appear to face uncertainty that cannot be resolved by information alone; trust in each others actions appears to be needed. Information is needed to resolve risk (a probability distribution can be constructed) but uncertainty (where no distribution can be made) requires trust in each others actions to be resolved and allow for rational decisions to be made. This article explores, based on interviews with some (about 14) of the most active patent licensing and patenting firms in the world, what strategies firms use to create such trust in each others actions, which allows for exchange in (uncertain) extant and new technical ideas based on the patent system. In the case of patents, the rights and their economic value are particularly risky and uncertain, as new inventions may be in pipeline that can be held private (as trade secrets), creating hold-up and other non-cooperative behavior, and the right to sue (enforce) have uncertain outcome. A distinction is thus made between uncertainty in state of the art (new technology) and the process of managing the uncertainty using diverse strategies, and treatment of risk based on state of nature and probabilities, hoping to expand on Arrow’s and other’s work, to provide a treatment of uncertainty in economic theory. A systems analysis is done, where messages firms send to each other in implementing a strategy to create such trust (not to hold-up, sue, etc.) are analyzed, making up a “language of trust”. The analysis indicate that, irrespective of strategy, messages aim at creating mutual/multi-lateral self-restraint, and take the form of informal (norm based) and formal (rule based) contracts of self-restraint. This is thus a sociological problem the firms appear to solve and not an economic one (exchange), in order to sustain trade in ideas (based on the patent system). Four such strategies are identified, defining a process of what firms do to create trust in each others actions. This process seems to have some generality in that it can be found in other areas such as international relations, sports, families, and other organized cooperation. As economic theory is based on information (Arrow 1962), these findings may be useful to include uncertainty in economic theory, based on a sociological analysis, at least in the case of developing patent markets.