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

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 to apply trade-secret protection only when it increases welfare. This rationalizes important features of current legal practice. © 2009 The Author Published by Oxford University Press on behalf of Yale University. All rights reserved.