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Licensing a quality-enhancing innovation to an upstream firm

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  • Tian, Xiaoli

Abstract

This paper examines the case where a patent holder who is not a producer licenses its quality-enhancing innovation to an upstream firm, which sells its product through a downstream monopoly. It is found that the patent holder prefers a two-part tariff contract, which includes both a fixed-fee and per-unit output royalty. However, the royalty included in the licensing contract makes each firm price at a markup over marginal cost and therefore makes both consumers and the society worse off, if the innovation is small and the supplier is weak. From a welfare perspective, licensing by means of an ad valorem tax is more efficient, as it allows the upstream firm to be less aggressive when trading with the downstream firm.

Suggested Citation

  • Tian, Xiaoli, 2016. "Licensing a quality-enhancing innovation to an upstream firm," Economic Modelling, Elsevier, vol. 53(C), pages 509-514.
    • Handle: RePEc:eee:ecmode:v:53:y:2016:i:c:p:509-514
    DOI: 10.1016/j.econmod.2015.11.001
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    References listed on IDEAS

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    Cited by:

    1. Zou, Yuxiang & Chen, Tai-Liang, 2020. "Quality differentiation and product innovation licensing," Economic Modelling, Elsevier, vol. 87(C), pages 372-382.
    2. Kabiraj, Abhishek & Kabiraj, Tarun, 2017. "Tariff induced licensing contracts, consumers’ surplus and welfare," Economic Modelling, Elsevier, vol. 60(C), pages 439-447.

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