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Better technology may be sold for a lower fee: The ad valorem tariff and licensing contract

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Author Info

  • Tomomichi Mizuno

    ()
    (Department of Economics, University of Nagasaki)

  • Kazuhiro Takauchi

    ()
    (Department of Economics, Management and Information Science)

  • Takeshi Iida

    (Graduate School of Economics, Kobe University)

Abstract

The main purpose of this study is to investigate how a relationship arises between an ad valorem tariff and licensed technology in a licensing contract. To this end, we study a two-country, two-firm duopolistic trade model. We consider a product market in which a high-tech foreign firm can license its production technology to an importing country. The government of the importing country chooses an ad valorem tariff rate but has no commitment power. In our model, the home government raises the tariff rate as the licensed technology improves. Our two main results in the case that a highly productive technology is licensed are paradoxical: First, better technology is sold for a lower fee in a licensing contract. Second, the profits of both the licenser and licensee decrease as the licensed technology improves. In other words, cost reduction reduces the profits of both the licenser and licensee. These findings indicate that because of the role played by the ad valorem tariff, technology licensing does not always benefit both the licensee and the licenser.

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File URL: http://www.econ.kobe-u.ac.jp/RePEc/koe/wpaper/2011/1109.pdf
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Bibliographic Info

Paper provided by Graduate School of Economics, Kobe University in its series Discussion Papers with number 1109.

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Length: 15pages
Date of creation: Jul 2011
Date of revision:
Handle: RePEc:koe:wpaper:1109

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Web page: http://www.econ.kobe-u.ac.jp
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Keywords: Licensing contract; Ad valorem tariff; Fixed fee;

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  1. Koon Lam Shea & Esther Y. P. Shea, 2006. "On the Equivalence of Ad Valorem Tariffs and Specific Tariffs under Duopoly," Review of International Economics, Wiley Blackwell, vol. 14(3), pages 445-451, 08.
  2. Kabiraj, Tarun & Marjit, Sugata, 2003. "Protecting consumers through protection: The role of tariff-induced technology transfer," European Economic Review, Elsevier, vol. 47(1), pages 113-124, February.
  3. Staiger, Robert W & Tabellini, Guido, 1987. "Discretionary Trade Policy and Excessive Protection," American Economic Review, American Economic Association, vol. 77(5), pages 823-37, December.
  4. Arijit Mukherjee, 2010. "Competition And Welfare: The Implications Of Licensing," Manchester School, University of Manchester, vol. 78(1), pages 20-40, 01.
  5. Eiji Horiuchi & Jota Ishikawa, 2009. "Tariffs and Technology Transfer through an Intermediate Product," Review of International Economics, Wiley Blackwell, vol. 17(SI), pages 310-326, 05.
  6. David R. Collie, 2006. "Tariffs And Subsidies Under Asymmetric Oligopoly: Ad Valorem Versus Specific Instruments," Manchester School, University of Manchester, vol. 74(3), pages 314-333, 06.
  7. Kaz Miyagiwa, 2004. "Saving Dolphins: Boycotts, Trade Sanctions, and Unobservable Technology," Emory Economics 0417, Department of Economics, Emory University (Atlanta).
  8. Gareth Myles, 1996. "Imperfect competition and the optimal combination of ad valorem and specific taxation," International Tax and Public Finance, Springer, vol. 3(1), pages 29-44, January.
  9. Mukherjee, Arijit & Pennings, Enrico, 2006. "Tariffs, licensing and market structure," European Economic Review, Elsevier, vol. 50(7), pages 1699-1707, October.
  10. Neary, J Peter & Leahy, Dermot, 2000. "Strategic Trade and Industrial Policy towards Dynamic Oligopolies," Economic Journal, Royal Economic Society, vol. 110(463), pages 484-508, April.
  11. Delipalla, Sofia & Keen, Michael, 1992. "The comparison between ad valorem and specific taxation under imperfect competition," Journal of Public Economics, Elsevier, vol. 49(3), pages 351-367, December.
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Cited by:
  1. Stefano Colombo & Luigi Filippini, 2012. "Patent licensing with Bertrand competitors," DISCE - Quaderni dell'Istituto di Teoria Economica e Metodi Quantitativi itemq1262, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).

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