When do patents encourage disclosure?

Joshua Gans
Tirole Mini-Course, 2010

Sunday, 11 July 2010

 The importance of disclosure

xt Increased
New Goods Productivity
at t
t
A Appropriated

Increase in
Knowledge

δ H A (At + A t )  t +1
A
   
Future Knowledge
R&D Productivity

Spillover

Sunday, 11 July 2010

 The importance of disclosure

• Endogenous growth theory

• Disclosures drive the rate of growth in income per capita
• Mechanisms for disclosure
• Patent requirements
“The owner of a design has property rights over its use in the production of
a new producer durable but not over its use in research. If an inventor has a
patented design for widgets, no one can make or sell widgets without the
agreement of the inventor. On the other hand, other inventors are free to
spend time studying the patent application for the widget and learn
knowledge that helps in the design of a wodget. The inventor of the widget
has no ability to stop the inventor of a wodget from learning from the
design of a widget. (Romer, 1990, S84-85, emphasis added)”

• Publications
• But disclosures assist competition: choice to disclose is endogenous

Sunday, 11 July 2010

 Some history

• Famous examples of secrecy

• Forceps delivery: invented by Chamberlen family in France (mid 1500s).
Emigrated to England and kept method secret for a century.
• Nineteenth Century debate over patents (Machlup-Penrose, 1950) was the
origin of the ‘contract theory of patents’
• “The patent constitutes a genuine contract between society and inventor;
if society grants him a temporary guaranty, he discloses the secret which
he could have guarded: quid pro quo, this is the very principle of
equity.” (Louis Wolowski, 1869)
• The idea is that disclosures would mitigate against wasteful duplication
although the innovator would have to be induced to ‘sign’ the social
contract.

Sunday, 11 July 2010

 Disclosures and entry

d : level of disclosure

∂F Easier to reverse
Pr(Entry) = F(d) >0
∂d engineer

Innovator Π
 − F(d)(Π − π )
Maximises Monopoly
Profit
Competitive
Profit

d =0
*

Sunday, 11 July 2010

 Patents and disclosures
∂F
Pr(Entry) = F(dPAT , s) <0
∂s
minimum disclosure strength of patent
requirements protection Makes successful
entry difficult

Π − F(dPAT , s)(Π − π ) > Π − F(0, 0)(Π − π )

   
Profits from Patenting Profits from Secrecy

F(0, 0) > F(dPAT , s)

Patent if reduce likelihood of entry

Sunday, 11 July 2010

 Welfare

• Patents are a ‘free option’ for monopolisation

• “No one can call that a fair bargain that which is voluntary on one side, and
involuntary on the other.” (Rogers, 1863)
• High disclosure requirement
• Reduces costs of duplication, k(d)
• Reduces patenting

Patenting reduces social duplication costs if ...

F(0, 0) k(dPAT )
>
F(dPAT , s) k(0)
  
<1

Denicolo & Franzoni, 2004 (vs Bessen, 2005)

Sunday, 11 July 2010

 Licensing and disclosure: patents

• Suppose that the innovator is not the ‘best’ agent to commercialise the
innovation
• Example: established firm with complementary assets that must otherwise
be duplicated at cost higher than the monopoly profits.
• Suppose that disclosure requires effort and is also non-contractible (tacit
knowledge; Arora, 1995) but increases profits, Π’(d) > 0. Will only choose to
disclose prior to agreement (no profit sharing)
• Innovator appropriates some share of the gains from trade

Gains from trade: Π(d) − F(d, s)Π(d)

∂d
≥0 − ∂F
Π′(d) − ∂2 F
Π(d) > 0
*

∂s ∂s 
∂d∂s
<0

Sunday, 11 July 2010

 Licensing under secrecy

• Arrow’s disclosure problem

• If want someone to buy an idea, need to disclose the idea to assess quality. Makes you
vulnerable to expropriation.
• Example: Bob Kearns and the intermittent windshield wiper
• Scorched earth threat
• Suppose that there are two (or more) potential buyers of an idea and they compete with one
another
• Threaten to give idea to rival firm if buyer does not pay (Anton & Yao, 2004)
• Tacit knowledge
• Suppose effort is required to transfer tacit knowledge
• Then, once paid for, no effort is undertaken but without a patent, vulnerable to expropriation.
• Right to exclude, creates incentive to transfer tacit knowledge (Arora, 1995)

Patents overcome the disclosure problem without resort to threats

and encourage licensing

Sunday, 11 July 2010

 Increased patent rights led to greater licensing

Sunday, 11 July 2010

 Gans, Hsu & Stern 2002

Sunday, 11 July 2010

 Timing of Licensing

from Gans, Hsu & Stern, 2008

Sunday, 11 July 2010
 Markets for ideas

• Rarely see fully-fledged markets for ideas

• Usually bilateral negotiations with little use of competitive options
• Multi-lateral exchange of ideas is observed
• Examples: academic science, open source communities, social networks
• Many challenges in designing markets
• Thickness
• Timing
• Risk
• Repugnance

Possible that markets for ideas work best when the price
is equal to zero!

Sunday, 11 July 2010

 Patents and Scientific Disclosure

• Scientists have non-monetary motivations

• Merton, Sociology of Science
• Stern (2004): Scientists pay to be scientists
• Patents and commercial motivations create conflicts
• Aghion, Dewatripont & Stein (2008): academic freedom as a contracting
issue
• Heller and Eisenberg: patents are hindering open science
• Empirical association of patents and publications
• Murray (various): patents are often paired with papers and vice versa

Sunday, 11 July 2010

 Choice of disclosure regimes

Publication disclosure (d)

0 D

Commercial Patent-Paper
1
Science Pairs
Patent
(i)
0 Secrecy Open Science

Sunday, 11 July 2010

 Preferences

• Scientist

U= w + bS d
wage kudos

• Firm (Funder)

Π − k − w − F(d, dPAT , s)(Π − π )

Capital
Cost

Sunday, 11 July 2010

 Probability of Entry
1 Pr (Disclosure)
1
= (1 − α ) ( i Pr (Learn from Patent)+Pr(Learn from Pub))
π + α i Pr(Learn from Either)
= (1 − α ) ( idPAT + d ) + α ( idPAT + d − idPAT d )
(1 − i ρ )π = idPAT + d − α idPAT d

Random
(1 − i ρ )π − iλ + bE (id PAT + d − α id PAT d)
Pr(Disclosure) Fixed
= Pr (entry) Cost, θ
(1 − i ρ )π − iλ
0 0

Sunday, 11 July 2010

 Expected Profits

Π
 − k − w − Pr(successful entry)(Π − π )
Monopoly capital Competitive
Profit cost Profit

Pr (successful entry)
= (1 − i ρ )Pr(entry)
= (1 − i ρ ) ( (1 − i ρ )π − iλ + bE (idPAT + d − α idPAT d))

The potential for entry is increasing in both patenting and publication

disclosure, while the cost of entry may or may not rise if there is a patent.

Sunday, 11 July 2010

 Total surplus maximisation

max d bS d + Π − k − F(d, dPAT , s)(Π − π )

• Patents and publication are complementary
• Driver 1: congruence (overlap) between knowledge in patent and knowledge
in publication
• Driver 2: patent protection reduces competitive risk from published
disclosures
∂ TS
2
∂F 2
=− (Π − π ) > 0
∂d∂s ∂d∂s

<0
• Driver 3: when w = 0, patent protection increases commercial returns and
greater disclosure rights are the only means by which these can be shared
with the scientist

Sunday, 11 July 2010

 Complementarity

Patent
strength
Commercial Patent-Paper Pairs
Science

Open
Secrecy
Science

Kudos

Sunday, 11 July 2010

 Generating Substitutability

 Static model yields several clear drivers of

complementarity between patents and publications
 Theory of patent-paper pairs
 Micro-foundation for endogenous growth assumption

 Conflicting empirical evidence

 Murray and Stern: citations fall following patent grant
 Williams: fewer follow-on commercialised products when
scientific knowledge subject to IP protection

 Empirical research identifies impact on follow-on research

direction and acknowledgment (source of kudos)

Sunday, 11 July 2010

 Licensing cumulative innovation

• Suppose that future research teams build on current innovation

• Disclosures reduce costs to future research teams
• Having a patent, gives current research team an opportunity to extract some
future innovative rents through licensing
• Suppose that licensing is accompanied by full disclosure (no non-
contractibility problem)
• Publication may allow some knowledge transfer even without licensing
• Therefore, publication reduces the future license fee
• As future licensing is only possible with a patent, it follows that stronger
patent incentives may cause a reduction in publication incentives
• This is countered by static publication incentives and also scientist’s desire
for future kudos (through citation)

Sunday, 11 July 2010

 Substitutability

Patent
strength Commercial
Science
Patent-Paper Pairs

Open
Secrecy Science

Kudos

Sunday, 11 July 2010

 Strategic publication

• Multi-stage R&D race

• Suppose one firm is leading (closer to obtaining a patent)
• The other firm has an incentive to publish intermediate results to change
the prior art and shift forward the patent ‘prize’ (Bar, 2006)
• Observed in DNA sequencing races (Eisenberg, 2000)
• Firm with existing, core patent
• Faces competition from follow-on innovators
• Firm with patent has incentive to publish to shift forward the next
generation patent threshold
• Not clear how important ‘defensive publication’ is empirically

Sunday, 11 July 2010

 Some References
Aghion, P., Dewatripont, M., & Stein, J. 2009. Academic freedom, private-sector focus and the process of innovation. RAND Journal of
Economics, 39(3), pp.617-635.
Anton, J.J. and D.A. Yao (1994), “Expropriation and Inventions: Appropriable Rents in the Absence of Property Rights,” American
Economic Review, 84 (1), pp. 190-209.
Arora, A. (1995), “Licensing Tacit Knowledge: Intellectual Property Rights and the Market for Know-How,” Economics of Innovation & New
Technology, 4, pp. 41-59.
Arrow, K. 1962. Economic Welfare and the Allocation of Resources for Invention. R. Nelson, ed. The Rate and Direction of Inventive
Activity. Princeton University Press, Princeton, NJ, 609-25.
Bar, T. 2006. Defensive Publications in an R&D Race. Journal of Economics & Management Strategy, 15 (1), 229-254.
Bessen, J. (2005), “Patents and the Diffusion of Technical Information,” Economics Letters.
Denicolo`, Vincenzo, Franzoni, Luigi Alberto, 2004. The contract theory of patents. International Review of Law and Economics 34, 365–
380.
Gans, J.S., D.H. Hsu and S. Stern (2002), “When Does Start-up Innovation Spur the Gale of Creative Destruction?” RAND Journal of
Economics, 33, pp.571-86.
Gans, J.S., D.H. Hsu and S. Stern (2008), “The Impact of Uncertain Intellectual Property Rights on the Market for Ideas: Evidence for
Patent Grant Delays,” Management Science, 54(5), pp.982-997.
Gans, J.S. and S. Stern (2010), “Is there a market for ideas?” Industrial and Corporate Change.
Machlup, Fritz, and Penrose, Edith, 1950. The patent controversy in the nineteenth century. The Journal of Economic History 10 (1), 1–29.
Merton, R.K. 1973. The normative structure of science. In The sociology of science: Theoretical and empirical investigations: 267-280 (Ch.
13). Chicago, IL: The University of Chicago Press.
Murray, F. 2002. Innovation as co-evolution of scientific and technological networks: Exploring tissue engineering. Research Policy, 31
(8-9): 1389-1403.
Murray, F., & Stern, S. 2007. Do formal intellectual property rights hinder the free flow of scientific knowledge? An empirical test of the anti-
commons hypothesis. Journal of Economic Behavior and Organization, 63(4), 648-687.
Stern, Scott. 2004. Do scientists pay to be scientists? Management Science. 50(6), pp.835-853.
Williams, H. 2009. Intellectual Property Rights and Innovation: Evidence from the Human Genome. mimeo., Harvard

Sunday, 11 July 2010