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Static inefficiency of compulsory licensing: Quantity vs. price competition

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  • Cugno, Franco

    ()

  • Ottoz, Elisabetta

    ()

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 and D incentives. We study the issue in a model where the innovative firm, under the threat of compulsory licensing, react 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 zero fixed fee. 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.

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File URL: http://polis.unipmn.it/pubbl/RePEc/uca/ucapdv/cugnoottoz80.pdf
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Bibliographic Info

Paper provided by Institute of Public Policy and Public Choice - POLIS in its series POLIS Working Papers with number 73.

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Length: 27 pages
Date of creation: Nov 2006
Date of revision:
Handle: RePEc:uca:ucapdv:73

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Web page: http://polis.unipmn.it

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Keywords: compulsory licensing; essential facilities; entry; welfare;

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