Profit-enhancing know-how disclosure: A strategic view

In general, the disclosure of know-how and technological knowledge could harm the disclosing firm. Firms, however, often share their know-how freely and enhances their profits. We provide a theoretical framework and a new insight for know-how disclosure. We consider a multi-product oligopolistic market. An incumbent firm that can disclose its cost-reducing know-how and several new entrants exist. Each firm supplies products in two separate markets. The incumbent firm has already allocated its production resources to one of the markets (market A) and discloses its know-how concerning production in market A. We show that the disclosure of know-how for cost reduction can enhance the profit of the incumbent (the disclosing) firm. Using the disclosed know-how, the entrants can produce at a low cost at market A and allocate their production resources to the other market. As a result, the competition at market A is milder than that in the case in which the incumbent does not disclose its know-how. Moreover, the disclosure could harm the new entrants. The result implies that the incumbent firm may disclose its know-how in its industry as a payoff-enhancing entry deterrent.