Article | Journal of Economics & Management Strategy | summer 2003

Patents, Invalidity, and the Strategic Transmission of Enabling Information

by James J. Anton and Dennis A. Yao

Abstract

The patent system encourages innovation and knowledge disclosure by providing exclusivity to inventors. Exclusivity is limited, however, because a substantial fraction of patents have some probability of being ruled invalid when challenged in court. The possibility of invalidity--and an ensuing market competition--suggests that when an innovator's capability (e.g., cost of production) is private information, there is potential value to an innovator from signaling strong capability via a disclosure that transfers technical knowledge to a competitor. We model a product-innovation setting in which a valid patent gives market exclusivity and find a unique signaling equilibrium. One might expect that as the probability that a patent will be invalid becomes low, greater disclosure will be induced. We do not find this expectation to be generally supported. Further, even where full disclosure arises in equilibrium, it is only the less capable who make full disclosures. The equilibrium analysis also highlights many of the novel and appealing features of enabling knowledge disclosure signals.

Keywords: System; Innovation and Invention; Knowledge Dissemination; Courts and Trials; Competition; Patents; Corporate Disclosure;

Citation:

Anton, James J., and Dennis A. Yao. "Patents, Invalidity, and the Strategic Transmission of Enabling Information." Journal of Economics & Management Strategy 12, no. 2 (summer 2003): 151–178. (Harvard users click here for full text.)