Preliminary Draft

An innovative firm chooses strategically whether to patent its process innovation or rely on trade secrecy. By doing so, the firm manages its rival’s beliefs about the size of the innovation, and affects the incentives in the product market. I analyze how the equilibrium patenting choices of an innovative firm with unknown costs and probabilistic patent validity are affected by the competitive pres-sure in the product market. This analysis is done by varying the degree of product differentiation, and by comparing incentives un-der Bertrand and Cournot competition. Furthermore, I explore the consequences for expected profits, and welfare