Choosing Intellectual Protection: Imitation, Patent Strength and Licensing

This paper investigates the choice of intellectual property protection for a process innovation. We set up a multi-stage model in which choosing between patent and trade secrecy is affected by three parameters : the patent strength defined as the probability that the right granted by the patent office to the innovator is upheld by the court, the ratio of imitation cost to innovation cost, and the innovation size defined as the extent of the cost reduction. We show that the choice of the protection regime is the result of two effects - the competition effect and the damage effect - and we analyze the influence of the three previous parameters on these effects. We find that large innovations are likely to be kept secret whereas small innovations are always patented. Furthermore, medium innovations are patented only when patent strength is high enough. Finally, we investigate patent licensing agreements that are used as a way to settle disputes between patentholders and their competitors.