An innovative firm with private information about its indivisible process innovation chooses strategically whether to apply for a patent with probabilistic validity or rely on secrecy. By doing so, the firm manages its rivals' beliefs about the size of the innovation, and affects the incentives in the product market. A Cournot competitor tends to patent big innovations, and keep small innovations secret, while a Bertrand competitor adopts the reverse strategy. Increasing the number of firms

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... s a greater (smaller) patenting incentive for Cournot (Bertrand) competitors. Increasing the degree of product substitutability increases the incentives to patent the innovation. 1 Of course, there are alternative explanations for this so-called patent paradox, such as the buildup of patent portfolios to improve a firm's bargaining position (e.g., Hall and Ziedonis, 2001) . 2 If a process innovation cannot be broken in small parts, then the full disclosure requirement of a patent only leaves the choice between truthful disclosure or complete concealment of the technology.