Chapter 1: Optimal Use of Patents and Trade Secrets for Complex InnovationsIn this paper, the optimal protection of "complex" innovations that involve multiple complementary components is considered. The innovator can protect each component through either patent or trade secret protection, so that the complete innovation may be protected through a mix of patents and trade secrets. The innovator faces potential entrants who might acquire the components either by costly imitation or through licensing. It is shown that: (i) secrecy is optimal when the patent length is relatively short; otherwise, a combined use of patents and trade secrets is optimal. (ii) The innovator is (weakly) over-rewarded compared to an inventor with a simple innovation (with identical profitability and imitation cost). (iii) A "Strict Utility Requirement" policy (that precludes the use of a patents-secrets mix) enhances allocative efficiency ex-post but stifles R&D incentives ex-ante.Chapter 2: Welfare Effects of Certification under Latent Adverse Selection (with Anthony Creane and Thomas D. Jeitschko)Asymmetric information is a classic example of market failure that undermines the efficiency associated with perfectly competitive market outcomes: the "lemons" market. Credible certification, that substantiates unobservable characteristics of products that consumers value, is often considered a potential solution to such market failure. This paper examines welfare effects of certification in markets in which there is asymmetric information, but without an adverse selection problem. We analyze the market equilibrium when the certification technology becomes available and contrast this with the equilibrium without certification. We find that despite an improvement in allocative efficiency, overall welfare may decrease due to the possibility of certification when such certification is either costly or inaccurate. In fact, most of these results are not derived from the direct welfare cost of certification, but rather from certification's effect on the market(s). Chapter 3: A Role of Non-practicing Entity (NPE) when Patent Ownership is FragmentedThis paper presents a mechanism by which a non-practicing entity (NPE) enhances returns to individual inventors. Assuming an environment in which: (i) a product, manufactured by a practicing entity (PE) must adopt all complementary innovations patented and owned by individual inventors; and (ii) a threat of litigation by an individual inventor is not credible so that patents are sold through a sequential auction, the following two games are studied in turn. First, I consider the game played by two PEs in which they compete to acquire the patents, and then negotiate licensing fees based on their patent portfolio in the shadow of litigation. Next, the same game played by a PE and a NPE. I highlight the two key findings: (i) in the former game, the two PEs buy all patents at 0 prices, and thus the aggregate payoff to the individual inventors is also 0 (for almost all parameter values); and (ii) in the latter game, on the contrary, if total number of patents is sufficiently large, the existence of the NPE induces the PE to buy some patents at a positive price and thereby increases the aggregate payoff to the individual inventors.
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