An analysis of technology licensing and parallel importation under different market structures

Parallel importation, also referred to as the “gray market”, is the unauthorised import of genuine-branded products into a country without the permission of the intellectual property owner. We develop a game-theoretic model to examine the issues of technology licensing and parallel importation in a setting with one leading manufacturer in a developed country (high market) that can license its innovative technology to one manufacturer in a developing country (low market). By considering that the high market is in a monopoly or in a duopoly, we investigate the impact of parallel importation on the profits of players and the unit licensing fee. Then, we analyze the leading manufacturer's optimal licensing decision considering parallel importation. We show that the leading manufacturer's profit is always worse off due to the emergence of parallel importation, no matter whether the high market is in a monopoly or in a duopoly. Nevertheless, the leading manufacturer may still have the motivation to license the technology. Interestingly, the leading manufacturer may reduce the unit licensing fee when parallel importation occurs in the duopoly setting. Furthermore, the profit of the manufacturer in the developing country may decrease when parallel importation arises, although parallel importation enhances the manufacturers’ overall market demand. The main insights extend to settings with alternative demand functions.