Designing a Market for Secrets

Abstract

In a world without intellectual property protection, inventors have an incentive to sell (and firms have an incentive to buy) inventions as secrets. In this paper, I give a general framework about how a market for secret inventions can operate. Specifically, I model the auction as a game between three classes of players: inventors, auctioneers, and firms. An inventor give away their entire idea to the auctioneer, who then sends a noisy signal of the idea to firms in order to entice them to bid. In order to get bids, the signal can't be "too vague" or "too specific." I then suggest that this model is analogous to real world markets.

Keywords: secrets, auctions, intellectual property

JEL Classification: H410, Z100, Z180