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Patent licensing revisited: heterogeneous firms and product differentiation

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  • Rubén Hernández-Murillo
  • Gerard Llobet

Abstract

In this paper we study the optimal licensing agreement between a patentholder of a cost-reducing innovation and firms that have heterogeneous uses for the new technology. We consider the case in which these firms are competitors in a downstream market. We extend the competition environment among the licensees beyond the Cournot/Bertrand models considered by the previous literature to a framework with differentiated products. We also assume that potential licensees have private information about the usefulness of the new technology. We characterize two purposes the optimal licensing contract serves to the patentholder: separation of the licensees and competition softening in the downstream market. We also describe how the optimal contract changes with the degree of product differentiation.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2002-031.

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Date of creation: 2004
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Publication status: Published in International Journal of Industrial Organization, January 2006, 24(1), pp. 149-75
Handle: RePEc:fip:fedlwp:2002-031

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Keywords: Patents;

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References

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  1. Fauli-Oller, Ramon & Sandonis, Joel, 2002. "Welfare reducing licensing," Games and Economic Behavior, Elsevier, vol. 41(2), pages 192-205, November.
  2. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  3. Llobet, Gerard, 2003. "Patent litigation when innovation is cumulative," International Journal of Industrial Organization, Elsevier, vol. 21(8), pages 1135-1157, October.
  4. Dixit, Avinash K & Stiglitz, Joseph E, 1993. "Monopolistic Competition and Optimum Product Diversity: Reply," American Economic Review, American Economic Association, vol. 83(1), pages 302-04, March.
  5. Wang, X Henry & Yang, Bill Z, 1999. "On Licensing under Bertrand Competition," Australian Economic Papers, Wiley Blackwell, vol. 38(2), pages 106-19, June.
  6. Macho-Stadler, Ines & Perez-Castrillo, J. David, 2001. "An Introduction to the Economics of Information: Incentives and Contracts," OUP Catalogue, Oxford University Press, edition 2, number 9780199243259.
  7. Choi, Jay Pil, 2001. "Technology transfer with moral hazard," International Journal of Industrial Organization, Elsevier, vol. 19(1-2), pages 249-266, January.
  8. Bousquet, Alain & Cremer, Helmuth & Ivaldi, Marc & Wolkowicz, Michel, 1998. "Risk sharing in licensing," International Journal of Industrial Organization, Elsevier, vol. 16(5), pages 535-554, September.
  9. Marie Thursby & Richard Jensen, 2001. "Proofs and Prototypes for Sale: The Licensing of University Inventions," American Economic Review, American Economic Association, vol. 91(1), pages 240-259, March.
  10. Wang, X. Henry, 1998. "Fee versus royalty licensing in a Cournot duopoly model," Economics Letters, Elsevier, vol. 60(1), pages 55-62, July.
  11. Beggs, A. W., 1992. "The licensing of patents under asymmetric information," International Journal of Industrial Organization, Elsevier, vol. 10(2), pages 171-191, June.
  12. Kamien, Morton I., 1992. "Patent licensing," Handbook of Game Theory with Economic Applications, in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 1, chapter 11, pages 331-354 Elsevier.
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Citations

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Cited by:
  1. Rey, Patrick & Salant, David, 2012. "Abuse of dominance and licensing of intellectual property," International Journal of Industrial Organization, Elsevier, vol. 30(6), pages 518-527.
  2. Giebe, Thomas & Wolfstetter, Elmar G., 2007. "License Auctions with Royalty Contracts for (Winners and) Losers," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 199, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  3. Weifang Lou, 2009. "Estimating the Impact of a Potential Process Innovation and the Optimal Strategy of Licensing," Working Papers 2009.03, School of Economics, La Trobe University.
  4. Chia Sun, 2014. "A conceptual framework for R&D strategic alliance assessment for Taiwan’s biotechnology industry," Quality & Quantity: International Journal of Methodology, Springer, vol. 48(1), pages 259-279, January.
  5. Josep Pijoan-Mas, 2006. "Precautionary Savings or Working Longer Hours?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 326-352, April.
  6. Shane B. Evans, 2010. "Innovation Contracts with Leakage Through Licensing," ANU Working Papers in Economics and Econometrics 2010-530, Australian National University, College of Business and Economics, School of Economics.
  7. Anthony Creane & Hideo Konishi, 2009. "Goldilocks and the Licensing Firm: Choosing a Partner when Rivals are Heterogeneous," Boston College Working Papers in Economics 720, Boston College Department of Economics.
  8. Evans, Shane, 2010. "Innovation contracts with leakage through licensing," Working Papers 10282, University of Tasmania, School of Economics and Finance, revised 05 Oct 2010.
  9. San Martín Lizarralde, Marta & Saracho de la Torre, Ana Isabel, 2012. "Two-part tariff licensing mechanisms," IKERLANAK Ikerlanak;2012-59, Universidad del País Vasco - Departamento de Fundamentos del Análisis Económico I.
  10. Weifang Lou, 2009. "Estimating the Impact of a Potential Process Innovation and the Optimal Strategy of Licensing," Working Papers 2009.03, School of Economics, La Trobe University.
  11. Elizalde, Abel & Repullo, Rafael, 2004. "Economic and Regulatory Capital: What is the Difference?," CEPR Discussion Papers 4770, C.E.P.R. Discussion Papers.
  12. Giebe, Thomas & Wolfstetter, Elmar G., 2006. "License Auctions with Royalty Contracts for Losers," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 96, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

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