The Social Accumulation of Knowledge

 The mere production of knowledge does not guarantee that others

will be able to exploit that knowledge (Polanyi; Mokyr)
 Tacit Knowledge
 Trade Secrecy

 Intriguingly, the ability to provide private incentives to produce

knowledge that can be exploited by others is a the heart of modern
theories of endogenous growth (Romer)

 Open Science and Patenting are two institutional arrangements

that require the disclosure of knowledge (Dasgupta and David)
 By and large, the spheres of knowledge governed by Open Science
and Patenting are assumed to be relatively independent
 The Duality of Knowledge
Adapted from Stokes (1996)
Immediate usefulness

Low High

Low

Scientific
Merit

High
 Disclosure of Perfume
“Anyone who cracks the code to know just how molecules of a certain
formation produce a certain smell is liable, not only to advance basic human
knowledge, but also to gain a great deal of money.” (Turin, 2003)

• Knowledge of perfume highly scientific - grounded in a complex mix of

organic chemistry, studies of the olfactory system but also useful -
however two distinct disclosure strategies exist in parallel.
• Three Nobel Prizes for “perfume” in the last century
• Wallach, 1910 - essential oils, including terpenes, were previously a mysterious field now
presented clearly in experimental as well as in theoretical respects, “must be regarded as
one of the greatest triumphs which chemical science has celebrated”
• Ruzicka, 1939 – for the investigation of very large number of important polyterpenes
which included many “odora” occurring in musk and civet, muscone and civetone.
• Noyori, 2001 - concerns molecules that occur in two forms that are mirror images of each
other - two forms often have totally different effects on cells e.g. the receptors in our
nose. One form of the substance limonene smells like lemons, while its mirror image
smells like oranges.
 Nobels vs. Noses
High levels of disclosure grounded in patents and
publications
 Knowledge of perfume highly scientific - grounded in organic
chemistry, studies of the olfactory system etc.
 In 1887, German scientist, Albert Bauer accidentally discovered
the organic molecule for musk & patented it. He also went on to
synthesize derivatives – musk xylene, musk ketone etc. (in Chanel
No. 5).
 Scientists began to elucidate rules linking structures to smell: e.g.
to smell musky macro-cycle ring must have 14-18 members. Both At the Takasago plant for (–)-menthol synthesis
new molecules and synthetic pathways are patented & published. (February, 1984). K.
Tani, H. Takaya, R. Noyori, S. Otsuka, S. Akutagawa,
 Japanese scientist, Ryoji Noyori (academic & industry scientist), and H. Kumobayashi.
shared the 2001 Nobel Prize in chemistry for the “asymmetric”
synthesis of new molecules such as menthol (> 400 publications &
> 100 patents)
 Secrecy also widespread
A lab the perfume institute in Versailles, New York Times
High levels of secrecy with very limited disclosure,
strongly fought secrecy and mythical status of
knowledge
 Highly formalized training e.g. International
Superior Institute of Perfume, Cosmetics and
Food Aromas, Paris.
 Individual “noses” who create the perfume
“recipes” are highly paid but secretive
(although their claim on royalties is subject to
legal challenge – so credit is complex)
 Tacit learning – often family links among
“noses”
 Also scientific – 2004 Nobel Prize for
describing how odor-sensing proteins in the
nose translate specific tastes and smells into
information in the brain
 The Disclosure of Knowledge in Pasteur‟s Quadrant
 A given piece of new knowledge may simultaneously have potential as a
great scientific discovery and as an important source of commercial
returns

 Multiple potential disclosure outcomes

 No systematic disclosures (Secrecy)
 Patenting (Commercial Science)
 Scientific Publication (Open Science)
 Both Patenting and Scientific Publication (Patent-Paper Pairs)

 A disclosure strategy is the choice among these disclosure choices, and

will be grounded in the microeconomic, strategic, and institutional
environment in which knowledge is funded, developed and diffused
How often are scientific research publications
part of patent-paper pairs?
# paired
% paired
# papers with
publications
patents
Publications by public sector
235 106 45%
funded researchers
Publications by public and private
70 41 59%
sector funded researchers
Publications by private sector
36 24 67%
funded researchers

Starting with publications: From a sample of 341 research publications (all the
research articles from the leading life science journal Nature Biotechnology
between 1997 and 1999). Examine which publications are also disclosed in
patents. (Murray and Stern 2007)
 How often are patents part of a
patent-paper pairs?
# paired with % paired
# patents
publications patents

Patents by public sector funded

1308 1099 84%
researchers

Patents by public and private sector

187 164 88%
funded researchers

Patents by private sector funded

2775 1347 49%
researchers

Starting with patents: From the full population of human gene patents (US patents
identified using bioinformatics methods that disclose and claim a human gene sequence
or fragment (Jensen and Murray 2005), we examine which patents are also disclosed in
publications. (Huang and Murray 2008 ).
 Research Questions
 What are the key factors shaping the disclosure of
knowledge in the form of scientific research publications,
patents, or both?
 A Theory of Patent-Paper Pairs

 How does disclosure strategy depend on the disclosure

environment?
 Patentability Requirements?
 Public versus Private Funding?
 The Potential for Licensing in the Market for Ideas?
 The Impact of Scientific and Market Competition?
 Scientific Researchers and
Private Research Investors
 Regardless of potential commercial returns, scientific researchers realize
benefits from knowledge disclosure through scientific publications
 Intrinsic preferences for kudos
 Signaling to both private and public employers
 Regardless of potential impact on the scientific community, private
research investors realize benefits through the protection of ideas
 Formal intellectual property rights (patents)
 Trade secrecy and inimitability
 Researcher preferences for scientific disclosure may conflict with the
commercial objectives of research funders
 May be willing to trade of wages for ability to publish in the scientific
literature

 Disclosure strategy results from the contract between researchers and

research funders when bargaining over compensation
 The Model
 Single researcher is hired by a single firm in order to produce
knowledge that potentially has significant scientific value and/or
commercial returns
 The firm‟s expected return from the innovation depends on their
ability to limit potential competition
 Relative to secrecy, a patent grant increases the fixed cost of entry (l)
 However, disclosures through patenting (dPAT) or publication (d) reduce the
fixed cost of entry
 The researcher cares about their monetary compensation (w) and
their ability to earn “kudos” through publication (bs)
 The disclosures requires for patenting and publication may be
independent of one another (low-fidelity) or completely
overlapping (high-fidelity)
Under what conditions does the firm and researcher
choose each of the following disclosure regimes?
Publication disclosure (d)
0 1
Commercial Patent-Paper
1
Science Pairs
Patent
(i)
0 Secrecy Open Science
 Preferences
 Scientist
U  w
  b
S
d
w age
kudos

 Firm/Private Funder
 Monopoly profit: P – w
 Competitive profit: p – w
 Expected profit of the private funder:
P k  w  P r(entry ( d , id P A T , i l )( P  p )
capital cost

 While researchers care about scientific disclosure, investors

care about the impact of disclosures on potential competition
 Disclosures Jointly Impact on Entry
 Consider a potential entrant who faces the following profit
function
p  i l  b E ( d  id P A T  id P A T d )  q

 l is the strength of patent protection

 bE is the reduced marginal cost of entry due to
disclosures d and dPAT
 q is distributed uniformly on [0,1]
 p + bE < 1 (entry always uncertain)

 The potential for entry is increasing in both patenting and

publication disclosure, while the cost of entry is increasing
in the receipt of a patent
 Negotiations
 Scientist and firm negotiations over disclosure regime:

m ax w , i , d  w  b S d )  P  k  w  (p  i l  b E ( d  id P A T  i d P A T d ))( P  p ) )

w  m ax  0, 12  P  k  (p  i l  b E ( d  id P A T  id P A T d ))( P  p )  b S d ) 
*

Unconstrained wage: w > 0 Constrained wage: w = 0

• Relative commercial return high • Relative commercial return low
• Choose (i, d) to maximise joint • Use d to transfer utility between
surplus firm and scientist (d > d)
• So long as • Choose (i, d) to maximise NTU
Nash objective
P  k   p  i l  b E id P A T ) ( P  p )
d d 
*
P  k  ( p  i l  b E id P A T )( P  p )
di 
*
b S  b E (1  id P A T )( P  p )
2 b E (1  id P A T )( P  p )
 Two key expressions shape the decision of whether to allow
scientific disclosure, patenting, or produce patent-paper pairs…
 Consider the choices that maximise surplus
b S d  P  k  (p  i l  b E ( d  id P A T ))( P  p )

 Scientific disclosure? … consider the ratio of the marginal

benefit versus marginal cost of scientific disclosures.
Choose no disclosure if
d   1  id P A T
bS
bE ( P  p )

 Patent?… consider the ratio of the marginal benefit to the

marginal cost of publication…choose to patent if
P  k  ( p  l  b E d P A T )( P  p )
i  P  k p ( P p )
 1  l  bE d PAT
 Complementarity: when patents and publications are partially
overlapping in terms of disclosure, the patent-paper regime expands
when the strength of intellectual property protection increases…

i

Commercial Patent-Paper
Science Pairs

Open
Secrecy
Science

1 d
 Stronger IP Protection
P  k  ( p  i l  b E id P A T )( P  p )
di 
*
2 b E (1  id P A T )( P  p )

 Increasing l
 More likely to take out a patent
 If there is publication, negotiate more disclosure

 Increasing dPAT
 Less likely to take out a patent
 If there is a publication, reduces disclosure

Stronger IP protection (higher l and lower dPAT) stimulates

openness in science
 Strategic Overlap
 Suppose that the knowledge published could be chosen and
related to the knowledge disclosed through patenting.
 No cost to same disclosures as in patent, so Commercial
Science does not arise.
 If choose to publish and patent disclosure requirements are
low, then worthwhile patenting even if it would otherwise
encourage entry; so no Open Science

 d  m in 1  l
,1   S ecrecy,
 bE d P A T 
otherw ise P atent-P aper P airs
 Independent Knowledge
 Suppose d and dPAT
revealed information i
about distinct knowledge
Commercial Patent-Paper
 When d > 1, surplus Science Pairs

maximisation would 1
involve 1 > d

 Wages always zero (the Secrecy Open

Science
outside option) when
there is publication
1 d
 Decisions do not interact.
 IP Protection Through Disclosures
 Baseline model: IP protection increases entry costs

 Suppose workaround not guaranteed to „work‟

 Entrant sinks costs, l, and generates probability, 1 – r, that
will still be excluded.
 Expected entrant profit: (1  i r )p  i l  b d  ib d  q
E E PAT

 Expected firm profit: P  k  w  (1  i r )  (1  i r )p  i l  b E

d  b E id P A T ) P  p )

 Marginal cost of publication falls when you have a patent

(1  i r ) b E ( P  p )
 Another rationale for complementarity
 i

Commercial Patent-Paper
Science Pairs

Open
Secrecy
Science

1 d
P  k  (1  r )((1  r ) p  l  b E d P A T
 i  P  k p ( P p )
 The Anti-Commons Effect
 Fear that patent thickets will deter scientific research
 Murray and Stern (2006) found that papers with patents
attached attracted fewer citations

 Assume that patent protection alters scientific kudos:

b S (1  ic ) d

 where c (< 1) parameterises the anti-commons effect.

 Only impacts on disclosures under Patent-Paper Pairs

 Substitutability
i
Commercial Patent-Paper
Science Pairs

Open
Secrecy Science

1 d
 Dynamics
 Suppose that scientists and firms live two periods
 Overlap with other generations

 Past knowledge reduces future capital costs, k

 Full transfer (under contracting): zero future costs
 Partial transfer (through publication): (1-dt-1)k

 Firm owns patent and can license it to next generation

 Disclosure, fee & wages now a 3-way negotiation
 Use Nash bargaining solution
 Past publication gives future pair an easier work-around if
there is no license – work-around possible (on same research
path) with probability r.
 License Negotiations
 Outcomes
 If no patent, t = 0
 If patent but no publication, t = k/3
 If patent but publication, t = k(1-(1-r)dt-1)/3

 Patent-Paper Pairs
 For d sufficiently high, patent-paper pairs can be an
equilibrium
 Presence of patent reduces incentives for publication and vice
versa when r < 1
 Increasing r causes more disclosure under patent-paper pairs
 Substitutability
i
Commercial Patent-Paper
Science Pairs

Open
Secrecy Science

1 d
 Other implications
 Look only at symmetric dynamic equilibria

 Inter-temporal complementarity
 Only worthwhile publishing if expect future scientific work to
be published (so can earn a citation)
 Therefore, always exists a commercial science or secrecy
equilibrium.

 Domain of open science is expanded as a result of

substitutability

 Key issue: who should own IP rights?

 Key Extensions
 The Marginal Impact of Public Funding

 Scientific and Commercial Research Racing

 The Potential for Kudos through Scientific Citation

 Empirical: measure all 4 regimes (including secrecy) using

the Human Genome Project
 10 years
 20,000 genes
 200,000 scientists
 1/3 not disclosed. Why?
 Conclusions
 The disclosure strategy of privately funded research is grounded in the
disclosure environment and is shaped by the bargaining over disclosure
between scientific researchers and their funders
 Rather than an anomaly, patent-paper pairs emerge as an equilibrium
outcome in which scientific researchers trade off wages in order to gain
scientific credit, while investors (private or public) seek to retain the
ability to capture value from these “dual-purpose” discoveries
 Interestingly, in most circumstances, increases in the strength of formal
intellectual property protection enhances the scope for patent-paper
pairs.
 More generally, the model suggests that the key requirements for
cumulative disclosure in the aggregate requires a careful evaluation of
the strategic foundations of disclosure strategy.