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Working Paper No. 09-07

Patenting in the Shadow of Independent Discoveries by Rivals
Tianle Zhang
November 2009; updated March 2010


This paper studies the decision of whether to patent in a dynamic model where firms innovate stochastically and independently. In the model, a firm can choose between patenting and maintaining secrecy to protect a successful innovation. Patenting grants probabilistic protection while secrecy is effective until rivals innovate. We show that (1) firms that innovate early are more inclined to choose secrecy whereas firms that innovate late have a stronger tendency to patent; (2) the incentives to patent increase with the innovation arrival rate; and (3) an increase in the number of firms may cause patenting to occur earlier or later, depending on the strength of patent protection. The socially optimal level of patent protection balances the trade-off between the provision of patenting incentive and the avoidance of unnecessary monopoly. We find that the socially optimal level of patent protection should be lower if the innovation arrival rate is higher or the number of firms is larger.

JEL classification: O31, O34
Keywords: Patenting decisions; Patents; Secrecy; Independent discoveries