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An economic analysis of trade-secret protection in buyer-seller relationships

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The economic analysis of trade-secret protection has traditionally focused on the interests of companies to conceal information from competitors in order to gain competitive advantage through trade-secret law. This has neglected cases in which the interest is not in concealing information from competi- tors, but from trading partners. We investigate the social e¢ ciency e¤ects of trade-secret protection in such cases. Many results from economic theory state that asymmetric information (and therefore also its legal protection) is socially undesirable since it leads to ine¢ cient trade. At the same time, protecting private information might create incentives for socially desirable investments. We model this trade-o¤ in a simple buyer-seller model and nd that, indeed, trade-secret protection has ambiguous welfare e¤ects. However, a simple, informationally undemanding rule, conditioning the applicability of legal protection on a minimum investment by the informed party to conceal the information, helps to apply trade-secret protection only when it increases welfare. This rationalizes important features of current legal practice, but sug- gests that the e¤ort to conceal rather than the e¤ort to reveal the information should play a role when deciding whether or not trade secret protection should be granted.

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Stefan Bechtold, Felix Höffler

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Adapt according to the presented license agreement and reference the original author.