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Licensing a Vertical Product Innovation

  • CHANGYING LI
  • JUNMEI WANG

This paper studies the case where an outside patent holder licenses its vertical product innovation to two Cournot competitors. It is found that, under a fixed-fee contract, the patent holder prefers exclusive licensing. However, under a royalty or two‐part tariff contract, the patent holder favours non‐exclusive licensing. Moreover, in contrast to the standard argument by Kamien and Tauman, we show that, from the perspective of the patentee, royalty licensing can be superior to fixed‐fee licensing, if the degree of innovation is small. Two‐part tariff licensing generates a monopoly outcome in the final market and hence reduces both consumer surplus and social welfare, if the innovation is low.

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File URL: http://hdl.handle.net/10.1111/j.1475-4932.2010.00630.x
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Article provided by The Economic Society of Australia in its journal Economic Record.

Volume (Year): 86 (2010)
Issue (Month): 275 (December)
Pages: 517-527

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Handle: RePEc:bla:ecorec:v:86:y:2010:i:275:p:517-527
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  1. Li, Changying & Geng, Xiaoyan, 2008. "Licensing to a durable-good monopoly," Economic Modelling, Elsevier, vol. 25(5), pages 876-884, September.
  2. Gallini, Nancy T, 1984. "Deterrence by Market Sharing: A Strategic Incentive for Licensing," American Economic Review, American Economic Association, vol. 74(5), pages 931-41, December.
  3. Avenel, E. & Caprice, S., 2006. "Upstream market power and product line differentiation in retailing," International Journal of Industrial Organization, Elsevier, vol. 24(2), pages 319-334, March.
  4. Francisco Caballero-sanz & Rafael Moner-colonques & Jose Sempere-monerris, 2005. "Licensing policies for a new product," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 14(8), pages 697-713.
  5. Rockett, Katharine, 1990. "The quality of licensed technology," International Journal of Industrial Organization, Elsevier, vol. 8(4), pages 559-574, December.
  6. Anderson, Simon P & Neven, Damien J, 1991. "Cournot Competition Yields Spatial Agglomeration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(4), pages 793-808, November.
  7. Fauli-Oller, Ramon & Sandonis, Joel, 2002. "Welfare reducing licensing," Games and Economic Behavior, Elsevier, vol. 41(2), pages 192-205, November.
  8. De Fraja, Giovanni, 1996. "Product line competition in vertically differentiated markets," International Journal of Industrial Organization, Elsevier, vol. 14(3), pages 389-414, May.
  9. Kamien, Morton I & Tauman, Yair, 2002. "Patent Licensing: The Inside Story," Manchester School, University of Manchester, vol. 70(1), pages 7-15, January.
  10. Nisvan Erkal, 2004. "Optimal Licensing Policy in Differentiated Industries," Department of Economics - Working Papers Series 894, The University of Melbourne.
  11. 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.
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  13. Sougata Poddar & Uday Bhanu Sinha, 2002. "On Patent Licensing in Spatial Competition," Departmental Working Papers wp0212, National University of Singapore, Department of Economics.
  14. Arijit Mukherjee & Soma Mukherjee, 2005. "Foreign Competition With Licensing," Manchester School, University of Manchester, vol. 73(6), pages 653-663, December.
  15. Luigi Filippini, 2005. "Licensing Contract In A Stackelberg Model," Manchester School, University of Manchester, vol. 73(5), pages 582-598, 09.
  16. Li, Changying & Song, Juan, 2009. "Technology licensing in a vertically differentiated duopoly," Japan and the World Economy, Elsevier, vol. 21(2), pages 183-190, March.
  17. Tarun Kabiraj, 2005. "Technology Transfer In A Stackelberg Structure: Licensing Contracts And Welfare," Manchester School, University of Manchester, vol. 73(1), pages 1-28, 01.
  18. Stamatopoulos, Giorgos & Tauman, Yair, 2008. "Licensing of a quality-improving innovation," Mathematical Social Sciences, Elsevier, vol. 56(3), pages 410-438, November.
  19. Shapiro, Carl, 1985. "Patent Licensing and R&D Rivalry," American Economic Review, American Economic Association, vol. 75(2), pages 25-30, May.
  20. Pal, Debashis & Sarkar, Jyotirmoy, 2002. "Spatial competition among multi-store firms," International Journal of Industrial Organization, Elsevier, vol. 20(2), pages 163-190, February.
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