Introduction

A firm wishing to protect its intellectual property from imitation has different options, notably patents, first-mover advantage, lead time, and secrecy. Although patents are often thought to be less effective at enabling the inventor to benefit from the innovation than other alternatives (Levin et al. 1987; Cohen et al. 2000), they have an important socially valuable feature that the alternatives lack. Specifically, patents can be used to sell technology, typically through licensing contracts.

This is our point of departure beyond the traditional approach to patents that has mainly focused on patents as means to exclude others. By reducing transaction costs, patents can play a key role in facilitating the purchase and sale of technology, or in other words, the development and functioning of a market for technology. A market for technology helps diffuse existing technology more efficiently; it also enables firms to specialize in the generation of new technology. In turn, such specialization is likely to hasten the pace of technological change itself. The reason for focusing on the development and functioning of a market for technology is that it greatly reduces the transaction costs involved in buying and selling technology, implying that innovators have the option of appropriating the rents from their innovation by means of simple contracts, instead of having to exploit the technology in-house.

However, the development of a market for technology is not an automatic outcome. It depends not only on the efficacy of technology licensing contracts (and on the strength of patents that underpin these contracts), but also on the industry structure itself.