Little patents and big secrets: Managing intellectual property

We examine how an innovator should manage its intellectual property when con-fronted with limited intellectual property rights and possible imitation. Exploita-tion of an innovation commonly requires some disclosure of enabling knowledge to selected Þrms or to the public (e.g. to obtain a patent or induce complementary investment). When property rights offer only limited protection, the value of the disclosure is offset by the created threat of imitation. Our model incorporates three features critical to understanding this decision: innovation creates asymmet-ric information, innovation often has only limited legal protection, and disclosure facilitates imitation by transferring enabling knowledge. Imitation depends in part on inferences the imitator makes about the innovators advance. We Þnd an equilibrium in which small inventions are fully disclosed, medium inventions are protected by both legal property rights and secrecy, and large inventions are pro-tected primarily through secrecy when property rights are weak. Our discussion is framed in terms of a Þrms decision of what to patent, what to disclose, and what to keep secret, but the model is adaptable to other intellectual property settings