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Optimal cross-licensing arrangements: Collusion versus entry deterrence

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  • Choi, Jay Pil
  • Gerlach, Heiko

Abstract

This paper analyzes optimal cross-licensing arrangements between incumbent firms in the presence of potential entrants. The optimal cross-licensing royalty rate trades off incentives to sustain a collusive outcome vis-a-vis incentives to deter entry with the threat of patent litigation. We show that a positive cross-licensing royalty rate, which would otherwise relax competition and sustain a collusive outcome, dulls incentives to litigate against entrants. Our analysis can shed light on the puzzling practice of royalty free cross-licensing arrangements between competing firms in the same industry as such arrangements enhance incentives to litigate against any potential entrants and can be used as entry-deterrence mechanism.

Suggested Citation

  • Choi, Jay Pil & Gerlach, Heiko, 2019. "Optimal cross-licensing arrangements: Collusion versus entry deterrence," European Economic Review, Elsevier, vol. 120(C).
    • Handle: RePEc:eee:eecrev:v:120:y:2019:i:c:s0014292119301679
    DOI: 10.1016/j.euroecorev.2019.103315
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    Cited by:

    1. Ioannou, Christos A. & Makris, Miltiadis & Ornaghi, Carmine, 2021. "R&D productivity and the nexus between product substitutability and innovation: Theory and experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 186(C), pages 135-151.

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    Keywords

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    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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