Economic analysis of the trade-off between patent and secrecy.

Summary Holding a patent requires investing first in R&D to innovate, then in private protection to choose a mode of industrial protection and finally in renewal to keep the title in force. These investment opportunities give the innovator one or more real options: a growth option for the R&D investment, a deferred enforcement option related to the choice of a protection mode and an abandonment option related to the non-renewal of the patent. The deferred enforcement option is characterized by two antagonistic forces: a tendency to pre-empt (immediate patent filing) and the incentive to delay the filing date in order to develop an innovation with a high degree of sophistication (deferred decision). To justify the low propensity of firms to use the patent system as a mode of protection, this study assesses the incentive (in terms of efficiency) of innovators to use the patent system and its effectiveness in deterring entry. The efficiency of the patent system will be demonstrated by comparing renewal decisions when opportunities for profitability or defense of the patentee's rights are taken into account with those obtained in the reference framework. If the objective pursued is the profitability offered by the title, then innovators seem to have an incentive to protect their innovation(s) as soon as possible and to maintain their title(s) for a longer period. On the other hand, if their objective is anti-counterfeiting then they would tend to delay the filing date and shorten the life of the patent. The boundaries of entry possibilities allow one to isolate the system that most discourages entry. Thus, if in a static setting the patent is an effective entry deterrent, secrecy may become the preferred mode of protection in a dynamic setting.