Markets for Secrets?

Originally posted on Notes On Liberty

In a world without intellectual property, would it be possible to buy and sell secrets? I suggest the answer is yes. In this post, I provide both a theoretical framework for such markets, as well as pointing to real life examples of such markets already existing.

Introduction

In a previous post, we talked about why information is the only public good. But of course, it’s possible to keep information private. Such private information is called a secret. Currently, entrepreneurs and inventors have two choices when they have what they believe is a profitable secret: they can either keep recipe, industrial process, or so on, a secret, and be protected by “trade secret” laws; or they can “publicize” their secret in exchange for a patent (which they can use to either issue injunctions against competitors or to extract royalties).

But there has been a lot of economics literature in recent years that challenges the status of intellectual property (IP). Most famously, there is Michele Boldrin and David K. Levine’s book Against Intellectual Monopoly, where they detail both an empirical and theoretical case against the economics of intellectual property. Furthermore, patent lawyer Stephan Kinsella’s book Against Intellectual Property gives a principled legal and ethical case against IP.

Although these arguments have been gaining some steam, they are still a minority view. Critics often refer to profit motives for inventors. “Without IP, an inventor can never trust anyone they tell their invention to. Unscrupulous businessmen will take advantage of them, and reap all the profits without paying a dime to the person who originated the idea. This injustice will mean that no one will have any incentive to sharing their innovations, and so society will stagnate.” 

In a working paper titled Designing a Market for Secrets, I explore this topic in detail. Here, I give the basic outline of how a market for secrets could work. I then follow up the theory with some real life examples that come close.

Theory for a Market for Secrets 

Imagine that the government announces that they have read Boldrin, Levine, and Kinsella, and as of today, intellectual property is no more. An inventor, Bob, has an idea that he’s keeping secret. Bob is not greedy. He would be willing to give his idea away—for a price. Bob is renowned for being a good inventor. Bob has no factory of his own; until yesterday his only income was to collect royalty payments from his previous ideas. But in this brave new world of no intellectual property, how could Bob make a dime?

Along comes Alice. Alice is a trusted member of the community. She is highly knowledgeable about a variety of technical fields, is a director of many corporate boards, and has a reputation for being discreet. Alice smells a business opportunity.

Alice approaches Bob, and says that if he trusts her with his secret, she will use her connections to find a buyer. How? By organizing an auction. She will go out and find the bidders, and give him a cut of the profit. But Alice won’t be like a typical auctioneer.

In a typical auction, the auctioneer usually has to divulge as much information as possible to attract bidders. Imagine an auction for cars. The auctioneer has to provide information about ownership history, maintenance history, driving history, and so on. The bidders are allowed to inspect the car. They walk around it, check out the engine block, kick the tires.

Alice isn’t in the same position. If Alice gives away too much information about the secret, then no one will want to bid since they know the secret themselves. But Alice can’t give away too little information either, since people want some idea of what they’re buying. In other words, Alice needs to optimize how much information she gives away to maximize the number of bidders.

How might this look like? Say Bob’s invention was a new way of manufacturing internal combustion engines. Alice would then reach out to firms she believes would be interested, and gives them some key information. “This is a new method of manufacturing internal combustion engines. It saves 30% more aluminum than previous methods. The inventor has a good reputation, and has been successful in the manufacturing process before. No similar invention exists on the market today, so the winning bidder will have a first mover advantage in utilizing their approach.”

Because the firms trust Alice, they will want to bid. Because Bob trusts Alice, he will want to divulge information to her. But Alice needs to take precautions to trust both Bob and the bidders. She does this by ensuring anonymity between Bob and the potential bidders. She must be the only one who knows all their identities. Alice does this so she can trust them.

If bidders knew that Bob was the inventor, they could approach him to cut a side deal and avoid the auction. If Bob learned who the bidders were, he could approach a losing bidder, reveal himself as the inventor, and try to “double dip” on his invention, while also potentially taking away the first mover advantage of Alice’s winning bidder. It’s because of these concerns that Alice needs to keep the auction double-blind.

Over time, Alice can attract other inventors, and a Yelp-like system of rating inventors might emerge. Alice herself might be subject to ratings as well, to assess how accurate and honest she is in divulging the limited information about the secret. And over time, as over entrepreneurs discover that selling ideas is a profitable business, others might compete with Alice as well.

Empirical Evidence for Markets for Secrets 

A skeptic might ask, “ok, that sounds good… in theory. But how likely are such markets to exist in practice?” My claim is that such markets of strategic information revelation (in limited form) already exist in today’s society. I will list two below.

The market for abandoned storage lockers 

Fans of the show Storage Wars will immediately recognize this example. When someone stops paying the rent on a storage locker, the contents are forfeited to the storage facility. Since going through each abandoned locker individually would be tedious and costly, storage facilities have come up with a solution: auctions.

The typical auction works like this. The auctioneer gathers all the bidders together in front of the locker. The auctioneer then cuts open the padlock in front of everyone, and reveals the shadowy objects inside. The bidders can shine a flashlight into the dark locker, but they are not allowed to step inside or touch any of the objects. The bidding then begins. (Talk about shadow pricing!)

The Market for Movies 

The astute reader would have guessed at this example from the very first sentence of this post. Movies are also promoted by strategically revealing information through trailers. The trailer vaguely details the plot, mentions some (but not all) of the actors, and adds some legitimacy with references to award-winning screenwriters or the producers that brought you another beloved film.

In this case, you can think of the screenwriter as the inventor, and the distributor as the auctioneer. Although there’s no need for anonymity between the buyers and the screenwriter, the trailer still needs to avoid giving away too much about the movie and spoiling it for the audience, or being too vague and not creating enough intrigue.

Conclusion 

It’s possible to buy and sell secrets in an auction. The key facets of the auction are that the auctioneer has to be trusted to accurately assess inventions and to be honest in revealing information, and the inventors and bidders must be kept secret from each other to preserve the integrity of the auction.

People are already buying secrets today in auctions for abandoned storage lockers. Movie trailers are also a kind of situation where a secret is being sold by strategically revealing it.

The point here is not to show that entrepreneurs will make more money, or will be more incentivized to reveal their secret inventions. I’m simply providing the evidence that the possibility of money making opportunities simply exists.