Intellectual Property Disclosure as “Threat”

This paper models the disclosure of knowledge as a "threat", useful in ensuring firms keep their commitments. We show that firms holding knowledge are better able to enforce agreements than firms that don’t. In markets requiring innovation to make a product, disclosure is a more powerful threat than entry by the punishing firm alone. Occasionally, the punishing firm won’t be able to innovate, making it impossible for it to enter the cheating firm’s market and punish. The punishing firm, however, can through disclosure credibly ensure that one, if not many, firms enter the cheating firm’s market. In the model, firms contract explicitly to exchange knowledge and tacitly to coordinate the introduction of innovations to the marketplace. We find conditions under which firms can self-enforce both agreements. The enforcement conditions are weaker when (1) firms possess knowledge and (2) knowledge is easily transferable to other firms. The disclosure threat has implication for antitrust law generally, which are considered.