University of Colorado Boulder Strategic Patent and Trade Secret Policy to Prevent Unintended Technological Outflow in Global Economy MWIEG October 2012 Toshihiro ICHIDA Waseda University and University of Colorado Boulder

Motivation 2 Roles of Patent system To give incentive to innovate a new thing (grant a monopoly for a certain period = duration of the patent protection) To contribute to followers by making the patented information available to the society (the disclosure requirement for patentability); to accelerate aggregate innovation = dissemination

Motivation 2nd disclosure requirement creates a problem for the original innovator. Imitation or Inventing-Around is abound How broad the patent system should be? 2 definitions of breadth (patent system): Product space … how substitutable these goods are Technology space … how costly it is to find a noninfringing substitute

Breadth of Patent: Example (Too) Broad Harvard Med School Oncomouse used in cancer research (patent applied to all mammals) Narrow Insulating sleeves for paper cups that protect users from burning their fingers (minor changes in the pattern of dimples stamped into the sleeves have received patent protection) Paper clips (various shapes)

Breadth and Imitation If broad, then NO imitation problem. (There will NOT be many competition because it is easy to infringe the original patent.) If narrow, then imitation prevails. (There will be many competing products which do not infringe the patent.)

Previous literature: Gallini 1992 Consider optimal patent system Given breadth (cost to imitate), what is optimal duration (length, T) of patent? Only look at one industry

This paper Extend Gallini (1992) by introducing heterogeneous imitation costs varying industry by industry (in the spirit of Dornbusch-Fischer-Samuelson 1977 model of a continuum of output sectors) Define breadth of the patent system by the statistical dominance of the distribution of the imitation cost Allow global competition in product market

Basic Model (modified Gallini 1992) An innovator comes up with an idea Decides to pay C > 0 to do research to make the idea marketable (This is not in Gallini 1992) After R&D, decides either to patent it or to keep it secret After patenting, the innovator may (or may not) face imitation from rivals After keeping it secret, the innovator faces the risk of someone figuring out the invention independently with probability p > 0.

Basic Model (Gallini 1992) Discount factor Let us define β(T) as follows Given the common discount rate per period r

Basic Model (Gallini 1992) Rivals After the innovator patented the product, Rival firms decides to pay the cost of imitation K > 0 and enter (or not) into the imitation market. If imitation is successful, Both the original innovator and rival firms (number is m) will compete in product market in an oligopolistic manner and earn π(m) They enter until profits are dissipated (Zero Profit Condition):

Basic Model (Gallini 1992) Profit for the innovator: successful patent Profit for the innovator: patent & imitation Profit for the innovator: trade secret

Basic Model (Gallini 1992) Expected Profit for the Innovator EΠ C E F

Basic Model (Gallini 1992) Imitation, Monopoly and Trade Secrecy T h m Patent & Imitation Imitation threshold line Trade Secret Patent & No Imitation a(p) f g Trade Secret K O j n

This paper Multiple industries with heterogeneous imitation cost: a continuum of goods indexed by z [0,1] Heterogeneous imitation cost k(z) such that k(·) is increasing in z. Low index z means easy to imitate and high z means hard to imitate. Let k*(z) denote for foreign country. One industry case K is used. Here we use k.

This paper Distribution of imitation costs: Home has broader patent system ~ F first order statistically dominates F* f F f* f 1 F* F k k O O

This Paper Given the distribution of imitation cost k, the government must pick an optimal duration of patent T which is common to all industry. We seek optimal T in autarky.

Optimal T in Heterogeneity Support of k can be partitioned: κS, κM, κP Secrecy, Imitation, and Patent κS=[0, KS(p)], κM=(KS(p), KM(T)], κS=(KM(T), Kmax] Consumer Surplus: SC, S(π) Dead-Weight Loss from Patent Monopoly: DWL(π)= SC – [S(π)+ (m(π)+1) π]

Optimal T in Heterogeneity The social problem is to maximize which can be reduced to minimize

Some (expected) results For the same industry category k≤k, Foreign goods are cheaper than Home goods. (Foreign has comparative advantage in easy-to-imitate goods.) If we compare autarky to trade, then Home will import imitation goods from Foreign and export hard-to-imitate goods.

Some (expected) results In autarky, the optimal length of patent differs between home and foreign. T > T*

Summary The work is still preliminary. Proof needs to be worked out.

Thank you for listening.