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License and Entry Strategies for an Outside Innovator Under Duopoly

Author

Listed:
  • Masahiko Hattori

    (Doshisha University)

  • Yasuhito Tanaka

    (Doshisha University)

Abstract

In Proposition 4 of Kamien and Tauman (Q J Econ 101:471–492, 1986), assuming linear demand and cost functions with fixed fee licensing it was argued that for the outside innovating firm under oligopoly when the number of firms is small (or very large), strategy to enter the market with license of its cost-reducing technology to the incumbent firm (entry with license strategy) is more profitable than strategy to license its technology to the incumbent firm without entering the market (license without entry strategy). However, their result depends on their definition of license fee, and it is inappropriate if the innovating firm can enter the market. If we adopt an alternative more appropriate definition based on the threat by entry of the innovating firm, license without entry strategy is more profitable in the case of linear demand and cost functions. Also we investigate the problem in the case of quadratic cost functions in which entry with license strategy may be optimal. Further we will show that the optimal strategies for the innovating firm when license fees are determined under the assumption that the licensor takes all benefit of new technology and its optimal strategies when license fees are determined according to Nash bargaining solution are the same.

Suggested Citation

  • Masahiko Hattori & Yasuhito Tanaka, 2018. "License and Entry Strategies for an Outside Innovator Under Duopoly," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 4(1), pages 135-152, March.
    • Handle: RePEc:spr:italej:v:4:y:2018:i:1:d:10.1007_s40797-017-0048-0
    DOI: 10.1007/s40797-017-0048-0
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    References listed on IDEAS

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    1. 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.
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    3. Morton I. Kamien & Yair Tauman, 1986. "Fees Versus Royalties and the Private Value of a Patent," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(3), pages 471-491.
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    Cited by:

    1. Masahiko Hattori & Yasuhito Tanaka, 2018. "License and Entry Strategies for an Outside Innovator Under Duopoly with Combination of Royalty and Fixed Fee," Journal of Industry, Competition and Trade, Springer, vol. 18(4), pages 485-502, December.
    2. Masahiko Hattori & Yasuhito Tanaka, 2020. "Entry of Innovator and License in Oligopoly," Journal of Industry, Competition and Trade, Springer, vol. 20(4), pages 709-731, December.
    3. Kim, Seung-Leul & Lee, Sang-Ho, 2021. "Optimal tariffs with emissions taxes under non-restrictive two-part licensing strategies by a foreign eco-competitor," MPRA Paper 108496, University Library of Munich, Germany.

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    More about this item

    Keywords

    Entry; License; Duopoly; Cost-reducing innovation; Innovating firm; Incumbent firm;
    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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