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Patent licensing, entry and the incentive to innovate

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  • Tauman, Yair
  • Zhao, Chang

Abstract

We analyze the economic impact of process innovations where the innovator auctions off licenses to both potential entrants and incumbent firms. It is shown that opening the market to entrant licensees, the incentive to innovate is maximized if the industry is initially a monopoly, as was envisioned by Schumpeter (1942). This is in contrast to previous literature on licensing of process innovations when entry is excluded: the incentive to innovate is maximized in an oligopoly market if licenses are sold by auction (Sen and Tauman, 2007) or in a competitive market if licenses are sold by royalty (Arrow, 1962). The post-innovation market structure, the diffusion of the innovation and the social welfare are analyzed and compared with the case where entry is excluded.

Suggested Citation

  • Tauman, Yair & Zhao, Chang, 2018. "Patent licensing, entry and the incentive to innovate," International Journal of Industrial Organization, Elsevier, vol. 56(C), pages 229-276.
    • Handle: RePEc:eee:indorg:v:56:y:2018:i:c:p:229-276
    DOI: 10.1016/j.ijindorg.2017.06.010
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    References listed on IDEAS

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    1. 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.
    2. Kamien, Morton I. & Oren, Shmuel S. & Tauman, Yair, 1992. "Optimal licensing of cost-reducing innovation," Journal of Mathematical Economics, Elsevier, vol. 21(5), pages 483-508.
    3. Morton I. Kamien & Yair Tauman, 1986. "Fees Versus Royalties and the Private Value of a Patent," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(3), pages 471-491.
    4. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626, National Bureau of Economic Research, Inc.
    5. Yongmin Chen & Marius Schwartz, 2013. "Product Innovation Incentives: Monopoly vs. Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 22(3), pages 513-528, September.
    6. Gilbert, Richard J & Newbery, David M G, 1982. "Preemptive Patenting and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 72(3), pages 514-526, June.
    7. Heidrun C. Hoppe & Philippe Jehiel & Benny Moldovanu, 2006. "License Auctions and Market Structure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(2), pages 371-396, June.
    8. Yair Tauman & Yoram Weiss & Chang Zhao, 2017. "Bargaining in Patent Licensing with Inefficient Outcomes," Department of Economics Working Papers 17-04, Stony Brook University, Department of Economics.
    9. Sen, Debapriya & Tauman, Yair, 2007. "General licensing schemes for a cost-reducing innovation," Games and Economic Behavior, Elsevier, vol. 59(1), pages 163-186, April.
    10. Michael L. Katz, 1986. "An Analysis of Cooperative Research and Development," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 527-543, Winter.
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    Cited by:

    1. E. Bacchiega & M. Colucci & M. Magnani, 2019. "What goes around, comes around: Reciprocal effects and double-sided moral hazard in the choice of brand licensing," Working Papers wp1136, Dipartimento Scienze Economiche, Universita' di Bologna.
    2. Yair Tauman & Yoram Weiss & Chang Zhao, 0. "Bargaining in Patent Licensing with Inefficient Outcomes," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 0, pages 1-18.
    3. Badia, Bruno D. & Tauman, Yair & Tumendemberel, Biligbaatar, 2020. "On the diffusion of competing innovations," Mathematical Social Sciences, Elsevier, vol. 108(C), pages 8-13.
    4. Sánchez, M. & Nerja, A., 2024. "The role of asymmetric innovation’s sizes in technology licensing under partial vertical integration," Research in Economics, Elsevier, vol. 78(2).
    5. Yair Tauman & Yoram Weiss & Chang Zhao, 2021. "Bargaining in Patent Licensing with Inefficient Outcomes," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 58(2), pages 321-338, March.
    6. Yue Li & Hang Guo & Sarah Yvonne Cooper & Hongqi Wang, 2019. "The Influencing Factors of the Technology Standard Alliance Collaborative Innovation of Emerging Industry," Sustainability, MDPI, vol. 11(24), pages 1-17, December.

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    More about this item

    Keywords

    Innovation; Patent licensing; Entry; Incentive to innovate;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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