Patents, Secrets, and the First Inventor Defense

Abstract

We analyze optimal patent design when innovators can rely on secrecy to protect their innovations. Secrecy provides a temporary monopoly, which terminates when the secret leaks out or the innovation is duplicated. We find conditions under which the optimal policy is to induce the first innovator to patent. Furthermore, we derive the optimal scope of the rights conferred to late innovators. We show that if the patent life can be suitably set, broad patent protection is optimal: late innovators should be allowed to patent and exclude first inventors who have relied on secrecy.

Keywords: Patents, Trade secrets, Intellectual property

JEL Classification: K11, O34, L00