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License or Entry in Duopoly with Quality Improving Innovation: Alternative Definitions of License Fee

Author

Listed:
  • Masahiko Hattori

    (Faculty of Economics, Doshisha University, Japan)

  • Yasuhito Tanaka

    (Faculty of Economics, Doshisha University, Japan)

Abstract

We examine the profitability of licensing a technology for producing a higher quality good or the same good at lower cost with or without entry into the market by an outside innovating firm under vertical product differentiation with ex-ante quality choice in duopoly. According to the definition of license fee by Kamien and Tauman (1986), the license with entry strategy is more profitable than the license without entry strategy for the innovating firm. However, the definition by Kamien and Tauman (1986) is inappropriate when the innovating firm has an option to enter the market, and if we adopt an alternative and more appropriate definition, the license without entry strategy is more profitable. We also show that the social welfare when the license fee is determined according to the alternative definition is lower than that when the license fee is determined according to the definition by Kamien and Tauman (1986) because in the latter case, the innovating firm enters the market; on the other hand, in the former case, it does not enter.

Suggested Citation

  • Masahiko Hattori & Yasuhito Tanaka, 2017. "License or Entry in Duopoly with Quality Improving Innovation: Alternative Definitions of License Fee," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 13(1), pages 1-26, February.
    • Handle: RePEc:jec:journl:v:13:y:2017:i:1:p:1-26
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    References listed on IDEAS

    as
    1. Nguyen, Xuan, 2014. "Monopolistic third-degree price discrimination under vertical product differentiation," Economics Letters, Elsevier, vol. 125(2), pages 153-155.
    2. Sen, Debapriya & Tauman, Yair, 2007. "General licensing schemes for a cost-reducing innovation," Games and Economic Behavior, Elsevier, vol. 59(1), pages 163-186, April.
    3. Masahiko Hattori & Yasuhito Tanaka, 2016. "Subsidizing New Technology Adoption in a Stackelberg Duopoly: Cases of Substitutes and Complements," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 2(2), pages 197-215, July.
    4. X. Henry Wang & Bill Z. Yang, 2004. "On Technology Licensing In A Stackelberg Duopoly," Australian Economic Papers, Wiley Blackwell, vol. 43(4), pages 448-458, December.
    5. Morton I. Kamien & Yair Tauman, 1986. "Fees Versus Royalties and the Private Value of a Patent," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 471-491.
    6. Masahiko Hattori & Yasuhito Tanaka, 2014. "Incentive for adoption of new technology in duopoly under absolute and relative profit maximization," Economics Bulletin, AccessEcon, vol. 34(3), pages 2051-2059.
    7. Pal, Rupayan, 2010. "Technology adoption in a differentiated duopoly: Cournot versus Bertrand," Research in Economics, Elsevier, vol. 64(2), pages 128-136, June.
    8. Naoki Watanabe & Shigeo Muto, 2008. "Stable profit sharing in a patent licensing game: general bargaining outcomes," International Journal of Game Theory, Springer;Game Theory Society, vol. 37(4), pages 505-523, December.
    9. Anne Duchêne & Debapriya Sen & Konstantinos Serfes, 2015. "Patent Licensing and Entry Deterrence: The Role of Low Royalties," Economica, London School of Economics and Political Science, vol. 82, pages 1324-1348, December.
    10. Tarun Kabiraj, 2004. "Patent Licensing in a Leadership Structure," Manchester School, University of Manchester, vol. 72(2), pages 188-205, March.
    11. Nguyen, Xuan & Sgro, Pasquale & Nabin, Munirul, 2014. "Licensing under vertical product differentiation: Price vs. quantity competition," Economic Modelling, Elsevier, vol. 36(C), pages 600-606.
    12. Boone, Jan, 2001. "Intensity of competition and the incentive to innovate," International Journal of Industrial Organization, Elsevier, vol. 19(5), pages 705-726, April.
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    Cited by:

    1. Masahiko Hattori & Yasuhito Tanaka, 2018. "License and Entry Decisions for a Firm with a Cost Advantage in an International Duopoly under Convex Cost Functions," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 14(1), pages 1-31, February.

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    More about this item

    Keywords

    ex-ante quality choice; technology development; license; market entry;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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