The Sale of Unprotected Inventions Under Alternative Models of Contracting Behavior

When property rights are unavailable or unenforceable for a specific invention it has been shown [Am. Econ. Rev. 84 (1994) 190] that it may still be possible for an independent inventor to enjoy some of the surplus generated by his invention. In this paper, I consider the case of an independent inventor with bargaining power who is free to choose the form of contracting when attempting to sell a valuable invention to firms in a duopoly industry. I show that an inventor with small wealth can do no better than to disclose his invention to a randomly chosen firm and make a contract offer. For moderate wealth, I show that, even though industry profit is maximized under a monopoly structure, the inventor may be indifferent between selling the invention to both firms by signaling the value of his invention (which is accomplished by offering contracts to both firms) and selling the invention to one firm (by offering a contract). When wealth becomes sufficiently large, I show that it is always more profitable for the inventor to signal the value of his invention (by offering a contract) to only one firm.