On the importance of market size and knowledge tradeability for intellectual property rights policy

This thesis contributes to the current debates concerning the optimal strength of Intellectual Property Rights (IPR) protection and the importance of such a system. The first part of the thesis constructs game theoretic models to examine the relationship between the strength of IPR and market size and how this relationship changes in the presence of licensing. The second part investigates empirically the effect of knowledge tradeability proxied by licensing activity on the choice of IPR protection strategies at the firm level.A particular issue of interest is how an increase in market size affects the strength of IPR protection. Chapter 2 addresses this question in a simple oligopoly model of R&D and Cournot competition with endogenous IPR policy. For a given degree of IPR protection, an increase in market size directly increases the incentives to innovate, which might suggest that less IPR protection is necessary to achieve a certain level of innovation in a larger market. However, larger markets also imply increased free-riding incentive, which suggests that stronger protection of IPR may be required to encourage innovation. In our framework, the latter effect dominates and thus optimal IPR protection is strengthened as market size increases.Chapter 3 introduces the possibility of licensing in the model. It is shown that in the licensing regime, although the same effects as before are maintained, the results are reversed. As market size increases, the IPR protection equilibrium declines. This new result shows that the presence of licensing can dramatically alter the design of IPR policy.Chapter 4 examines whether there is any empirical evidence that licensing, or more broadly knowledge trading, is an important factor to consider with regards to IPR policy formation. Specifically, building on a theoretical framework from Henry and Ponce (2011), the relationship between licensing and the choice of IPR protection methods such as patents and secrecy is analysed empirically using Australian firm-level data. One of our key findings is that firms engaged in licensing agreements are more likely to use secrecy than patents. This finding lends support to Henry and Ponce's [2011] prediction: When knowledge is tradeable, there is an alternative market-based mechanism to legal IPR protection