Using Patents in Promotional Activities

Abstract

A traditional view of patents and patenting shows a trade-off between the benefit of appropriation and the cost of information revelation. However, firms may benefit from information revelation to consumers because patents can provide credible information about the firm ’ s ability to develop new technologies and produce good quality products. In fact, we frequently observe that many firms use their patents for promotion in a variety of industries, including foods, cosmetics, and electronic devices. We construct a simple model to study a usage of patents in promotion activities, a promotional patent, and investigate an advantage for a firm to employ a promotional patent. We make two findings. First, we find a positive information value of a promotional patent to a high-type firm. The benefit stems from an increase in the consumers’ willingness to pay in two ways. The expected valuation to the consumers increases because i) the patented innovation directly improves the product quality and ii) the promotional patent increases a likelihood of the firm to be a high type. The firm then absorbs the increase of the expected valuation. Second, the information value to the high-type firm is non-monotonic. The information value increases (decreases) with a prior probability that a firm is a high type when the prior probability is low (high).