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Fee versus royalty licensing in a Cournot duopoly with increasing marginal costs

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  • Ramon Fauli‐Oller
  • Joel Sandonís

Abstract

We consider a symmetric homogeneous Cournot duopoly operating under increasing marginal costs. One of the firms owns a patented superior technology that reduces the intercept of the marginal cost function. We compare the incentives of the insider patentee to license the technology to the rival firm either through a fixed fee or through a royalty. We obtain that royalty licensing does not necessarily dominates in our setting: when decreasing returns are important, a royalty is superior only for small enough innovations, whereas a fixed fee is chosen for large innovations. Aditionally, we show that our model is able to replicate the results in Wang (2002), which analyzes the same question in a differentiated duopoly with constant marginal costs.

Suggested Citation

  • Ramon Fauli‐Oller & Joel Sandonís, 2022. "Fee versus royalty licensing in a Cournot duopoly with increasing marginal costs," Manchester School, University of Manchester, vol. 90(4), pages 439-452, July.
    • Handle: RePEc:bla:manchs:v:90:y:2022:i:4:p:439-452
    DOI: 10.1111/manc.12411
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    References listed on IDEAS

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    1. Vishwasrao, Sharmila, 2007. "Royalties vs. fees: How do firms pay for foreign technology?," International Journal of Industrial Organization, Elsevier, vol. 25(4), pages 741-759, August.
    2. Rabah Amir, "undated". "Market Structure, Scale Economies and Industry Performance," CIE Discussion Papers 2000-03, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
    3. Sen, Debapriya & Stamatopoulos, Giorgos, 2016. "Licensing under general demand and cost functions," European Journal of Operational Research, Elsevier, vol. 253(3), pages 673-680.
    4. Michael L. Katz & Carl Shapiro, 1985. "On the Licensing of Innovations," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 504-520, Winter.
    5. Henry Wang, X., 2002. "Fee versus royalty licensing in a differentiated Cournot duopoly," Journal of Economics and Business, Elsevier, vol. 54(2), pages 253-266.
    6. Wang, X. Henry, 1998. "Fee versus royalty licensing in a Cournot duopoly model," Economics Letters, Elsevier, vol. 60(1), pages 55-62, July.
    7. Arijit Mukherjee, 2014. "Licensing under convex costs," Journal of Economics, Springer, vol. 111(3), pages 289-299, April.
    8. Debapriya Sen & Giorgos Stamatopoulos, 2009. "Technology Transfer Under Returns To Scale," Manchester School, University of Manchester, vol. 77(3), pages 337-365, June.
    9. Debapriya Sen & Giorgos Stamatopoulos, 2019. "Decreasing Returns, Patent Licensing, and Price-Reducing Taxes," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 175(2), pages 291-307.
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