An Economic Analysis of Trade-Secret Protection in Buyer-Seller Relationships

Journal of Law, Economics & Organization 27 (2011), 137-158

46 Pages Posted: 9 Nov 2007 Last revised: 15 May 2014

See all articles by Stefan Bechtold

Stefan Bechtold

ETH Zürich

Felix Höffler

WHU - Otto Beisheim School of Management

Date Written: July 1, 2009

Abstract

The economic analysis of trade-secret protection has traditionally focused on the interests of companies to conceal information from competitors in order to gain a competitive advantage through trade-secret law. This has neglected cases in which the interest is not in concealing information from competitors, but from trading partners. We investigate trade-secret protection in such cases. Frequently, asymmetric information will lead to inefficient trade; at the same time, protecting private information might create incentives for socially desirable investments. We model this trade-off in a simple buyer-seller model and find that the optimal fine for violations of trade secrets is positive. In general, however, the welfare effects of increasing a fine are ambiguous. We discuss conditioning the legal protection on a minimum investment by the informed party to conceal the information, and argue that this helps applying trade-secret protection only when it increases welfare. This rationalizes important features of current legal practice.

Keywords: disclosure of information, hold-up problems, trade secrets

JEL Classification: K2, D82

Suggested Citation

Bechtold, Stefan and Höffler, Felix, An Economic Analysis of Trade-Secret Protection in Buyer-Seller Relationships (July 1, 2009). Journal of Law, Economics & Organization 27 (2011), 137-158, Available at SSRN: https://ssrn.com/abstract=1028478

Stefan Bechtold

ETH Zürich ( email )

IFW E 47.2
Zurich, 8092
Switzerland
+41-44-632-2670 (Phone)

HOME PAGE: http://www.ip.ethz.ch/people/bechtold

Felix Höffler (Contact Author)

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

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