Author(s)
Joshua Gans, David Hsu and Scott Stern
Source
Management Science, Vol. 54, No. 5, pp. 982-997, May 2008
Summary
This paper explores causes of uncertainty in the patent system and its role in the market for ideas.
Policy Relevance
Often only the realization of a patent, not an application, is sufficient for commercialization of an idea.
Main Points
- An innovator who develops a valuable idea may obtain economic control of his idea through a patent; but the patent is not certain to be granted and the innovator must wait while it is reviewed.
- The innovator may also seek a firm as a partner to help him exploit his idea in exchange for a share of the proceeds.
- In the absence of marketplace frictions, the innovator should be indifferent to partnering with a firm before or after the realization of a patent grant; in practice the innovator usually waits for the receipt of patent rights for several reasons.
- First, the grant of a patent acts as a signal to firms that the innovator’s idea is probably somewhat valuable.
- Second, since an innovator must work hard to find a firm and convince them of his idea’s promise, he might be unwilling to exert himself until he is certain the idea’s value will be secured by a patent.
- Finally, the innovator may fear that the firm will exploit his idea before his patent is granted if he reveals too much information in a pitch.
- The importance of a patent grant is reduced in industries that rely on copyright as well as in industries that rely heavily on reputation.
