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Bargaining over Entry with a Compulsory License Deadline: Price Spillovers and Surplus Expansion

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  • Eric W. Bond
  • Kamal Saggi

Abstract

We analyze bargaining between a developing country (South) and a multinational firm over the local price of its patented product. We use an alternating offers bargaining game in which the South can resort to compulsory licensing (CL) if the two parties fail to reach agreement by a certain deadline. The presence of international price spillovers introduces two novel features into the standard bargaining problem: the surplus from entry prior to the CL deadline may be negative, and CL can yield higher surplus than entry. We establish conditions under which equilibrium may exhibit immediate entry, preemptive entry just prior to the CL deadline, or the occurrence of CL. The South necessarily gains from the threat of CL if the joint payoff under entry is higher relative to CL but can lose if it is lower.

Suggested Citation

  • Eric W. Bond & Kamal Saggi, 2017. "Bargaining over Entry with a Compulsory License Deadline: Price Spillovers and Surplus Expansion," American Economic Journal: Microeconomics, American Economic Association, vol. 9(1), pages 31-62, February.
  • Handle: RePEc:aea:aejmic:v:9:y:2017:i:1:p:31-62
    Note: DOI: 10.1257/mic.20150031
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    References listed on IDEAS

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    Cited by:

    1. Bond, Eric W. & Samuelson, Larry, 2019. "Bargaining with private information and the option of a compulsory license," Games and Economic Behavior, Elsevier, vol. 114(C), pages 83-100.
    2. Bond, Eric W. & Saggi, Kamal, 2020. "Patent protection in developing countries and global welfare: WTO obligations versus flexibilities," Journal of International Economics, Elsevier, vol. 122(C).
    3. Eric W Bond & Kamal Saggi, "undated". "Compulsory licensing and patent protection: a North-South perspective," Vanderbilt University Department of Economics Working Papers 16-00011, Vanderbilt University Department of Economics.

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    More about this item

    JEL classification:

    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital

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