1. 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

2. 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

3. 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

4. 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)

5. 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.)

6. 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

7. 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

8. 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.

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

10. 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):

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

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

13. 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

14. 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.

15. 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

16. 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.

17. 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]

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

19. 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.

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

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

22. Thank you for listening.