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Static inefficiency of compulsory licensing: Quantity vs. price competition

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Author Info
Cugno, Franco ()
Ottoz, Elisabetta ()

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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&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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Publisher Info
Paper provided by Department of Public Policy and Public Choice - POLIS in its series P.O.L.I.S. department's Working Papers with number 73.

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

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

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Find related papers by JEL classification:
K00 - Law and Economics - - General - - - General (including Data Sources and Description)
L49 - Industrial Organization - - Antitrust Issues and Policies - - - Other
O34 - Economic Development, Technological Change, and Growth - - Technological Change - - - Intellectual Property Rights

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