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ELSEVIER Research Policy 26 (1997) 391-403

Patents, licensing, and market structure in the chemical industry
Ashish Arora *
Heinz School of Public Policy and Management, Carnegie Mellon University, Pittsburgh, PA 15213, USA Received 10 March 1997

Abstract
The strategies of rent appropriation and industry structure are inter-dependent. How firms use patents depends uponindustry structure, and in turn, affects industry structure. In the 19th century, market leaders in the chemical industry combined patents and secrecy to deter entry. Within cartels, patents were used to stabilize cartels and organize technology licensing. The role of patents changed in the less concentrated post World War II markets. In bulk organic chemicals and petrochemicals, chemicalproducers use licensing as an important means of generating revenue from process innovations. The increased importance of technology licensing is closely related to the emergence of a class of specialized process design and engineering firms that have played an important role in the development and diffusion of process innovations. © 1997 Elsevier Science B.V. JEL classification: 034; L10; L65 Keywords:Patents; Licensing; Market structure; Chemicals

1. Introduction

The link between market structure and appropriability conditions has long been a subject of study in the economics of technical change. In the Schumpeterian view, (temporary) monopoly power encourages innovation in part because monopoly power is thought also to improve appropriability. By the same token, appropriabilityconditions have been identified as one of the key determinants of industry structure. (See for instance the review article by Cohen and Levin (1989), and the references cited there, for

* Corresponding author. Tel.: + 1-412-268-2191; e-mail: ashish @andrew.cmu.edu.

evidence on both linkages). However, much of the economics literature has focused largely upon patents as the key appropriabilitymechanism and moreover, typically identified a patent with a discrete innovation. Patents are undoubtedly one of the instruments that firms use to capture rents from innovation, but there is mounting empirical evidence that the traditional economics view of patents is inadequate and even misleading. Patents are only one means of protecting technological investments, and often not the most importantmeans of doing so. The results of the well-known Yale survey (Levin et al. (1987)) suggested that for most 'high tech' industries (except chemicals) patents are less effective than alternatives such as lead time, secrecy, and complimentary sales

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and service effort. 1 Moreover, firms use patents in more subtle and sophisticated ways than simply as a legal barrier to deter rivals. An investigation of the role of patents and the alternative mechanisms for appropriating the rents from innovation can illuminate the larger question of the relationship between appropriability regime and market structure. How do theefficacy and the role of patents change with industrial structure, and in turn, how does the changing role of patents affect industry structure? This question forms the point of departure for a somewhat selective examination of the historical role of patents in the chemical industry. This essay will focus primarily upon organic chemicals, defined broadly to include petrochemical building blocks,synthetic fibers, plastics, and other types of chemical products based upon petrochemical feedstocks. Section 2 examines the strategies of firms in the pre World War I dyestuffs industry. The market leaders--the major German dyestuff c o m p a n i e s - skilfully combined patents with secrecy to deter entry and preserve market leadership. During the interwar years, patents were used to preserve the...