Competition and the Strategic Disclosure of Innovation: Theory and Evidence from Patent Applications

We develop a duopoly signaling model in which an innovative leader strategically announces a pending patent application to influence the follower’s behavior, both in the product market (in the short run) and in R&D (with effects in the long run). Our model captures different competitive structures by representing market competition in reduced form, thereby encompassing competition in both strategic substitutes and strategic complements with varying intensities. Extending the conventional wisdom of the optimality of disclosure under strategic substitutes, our model predicts some disclosure for low competition intensities under strategic complements when the follower’s R&D project is technologically less similar to the leader’s, and no disclosure even under strategic substitutes when competitors’ R&D exhibits high similarities. We provide empirical support for the model’s core predictions by identifying patent disclosures in press releases and using a technique from the corporate finance literature to measure the nature of market competition.