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Static Efficiency of Compulsory Licensing: The Role of Limit Pricing

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  • Franco Cugno
  • Elisabetta Ottoz

Abstract

A common argument against compulsory licensing of intellectual property maintains that it facilitates the entry of inefficient producers, which may reduce social welfare independently of any effects on R&D incentives. We study the issue in a model where the innovative firm, under the threat of compulsory licensing, reacts strategically by choosing between quantity and price competition. We show that the risk of a reduction in static welfare due to the entry of highly inefficient firms is avoided if licensing entails a royalty per unit of output and no fixed fees. The rationale behind this result lies in the fact that compulsory licensing threat works as a disciplining device to improve static social welfare, even when the applicant is a high cost inefficient firm. JEL codes: KOO, L49, 034.

Suggested Citation

  • Franco Cugno & Elisabetta Ottoz, 2007. "Static Efficiency of Compulsory Licensing: The Role of Limit Pricing," Journal of Interdisciplinary Economics, , vol. 19(1), pages 19-33, October.
    • Handle: RePEc:sae:jinter:v:19:y:2007:i:1:p:19-33
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    Keywords

    compulsory licensing; essential facilities; entry; welfare;
    All these keywords.

    JEL classification:

    • L49 - Industrial Organization - - Antitrust Issues and Policies - - - Other

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