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Welfare Reducing Licensing

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Author Info

  • Ramón Faulí-Oller

    ()
    (Universidad de Alicante)

  • Joel Sandonís

    ()
    (Universidad de Alicante)

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    Abstract

    In this paper, we characterize situations where licensing an innovation to a rival firm using two-part tariff contracts (a fixed fee plus a linear per unit of output royalty) reduces social welfare. We show that it occurs if and only if i) the goods are close enough substitutes, ii) the innovation is large enough but not drastic and iii) the firms compete in prices. Moreover, we show that, regardless of the type of competition, first, the optimal contract always includes a positive royalty and, second, even drastic innovations are licensed whenever the goods are not homogeneous.

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    File URL: http://www.ivie.es/downloads/docs/wpasad/wpasad-2000-12.pdf
    File Function: Fisrt version / Primera version, 2000
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    Bibliographic Info

    Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2000-12.

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    Length: 20 pages
    Date of creation: Jun 2000
    Date of revision:
    Publication status: Published by Ivie
    Handle: RePEc:ivi:wpasad:2000-12

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    Related research

    Keywords: Two-part tariff contracts; licensing;

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    References

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    1. Erutku, C. & Richelle, Y., 2000. "Optimal Licensing Contracts and the Value of a Patent," Cahiers de recherche 2000-07, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    2. ERUTKU, C. & RICHELLE, Yves, 2000. "Optimal Licensing Contracts and the Value of a Patent," Cahiers de recherche 2000-07, Universite de Montreal, Departement de sciences economiques.
    3. Vives, Xavier, 1985. "On the efficiency of Bertrand and Cournot equilibria with product differentation," Journal of Economic Theory, Elsevier, vol. 36(1), pages 166-175, June.
    4. Kamien, Morton I & Tauman, Yair, 1986. "Fees versus Royalties and the Private Value of a Patent," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 471-91, August.
    5. Katz, Michael L & Shapiro, Carl, 1986. "How to License Intangible Property," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 567-89, August.
    6. Macho, I. & Martinez-Giralt, X. & Perez-Castrillo, D., 1993. "The Role of Information in Licensing Contract Design," UFAE and IAE Working Papers 216.93, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
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