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Licensing Contract In A Stackelberg Model

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  • LUIGI FILIPPINI

Abstract

We study optimal linear licensing and its social welfare implications when the innovator (patentee) is an insider that can make capacity/output commitment so as to act as a Stackelberg leader in the output market. We show that (i) the patentee's profit‐maximizing licensing contract is a royalty; (ii) the optimal royalty rate is greater than the cost reduction attained by the licensed technology and is increasing in the number of competitors; (iii) optimal licensing maximizes the likelihood of technology transfer, may reduce social welfare and always makes consumers worse off; and (iv) the innovator benefits from capacity commitment, and the more competitive the output market, the greater the gains it makes by licensing. The opposite holds for consumers.

Suggested Citation

  • Luigi Filippini, 2005. "Licensing Contract In A Stackelberg Model," Manchester School, University of Manchester, vol. 73(5), pages 582-598, September.
    • Handle: RePEc:bla:manchs:v:73:y:2005:i:5:p:582-598
    DOI: 10.1111/j.1467-9957.2005.00465.x
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