Licensing of a quality-improving innovation
AbstractWe study the licensing of a quality-improving innovation in a duopoly model with heterogeneous consumers. Firms compete in prices facing a logit demand framework. The innovator is an outsider to the market and sells licenses via up front fee (determined in an auction), royalty or their combination. We show that if the market is covered then irrespective of the magnitude of the innovation both firms acquire the new technology and pay positive royalty and zero up-front fee. The increase in social welfare due to the innovation is totally extracted by the innovator. For the uncovered market case we show that if the consumer heterogeneity is sufficiently high, then both firms become licensees. The licensees pay positive royalty and zero up-front fee-if the value of an outside alternative option is low-and both positive royalty and positive up-front fee -- if the value of the outside alternative option is high.
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Bibliographic InfoArticle provided by Elsevier in its journal Mathematical Social Sciences.
Volume (Year): 56 (2008)
Issue (Month): 3 (November)
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Web page: http://www.elsevier.com/locate/inca/505565
Quality-improving innovation Random utility Logit Licensing Covered market Uncovered market;
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