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Licensing of a quality-improving innovation

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  • Stamatopoulos, Giorgos
  • Tauman, Yair

Abstract

We study the licensing of a quality-improving innovation in a duopoly model with heterogeneous consumers. Firms compete in prices facing a logit demand framework. The innovator is an outsider to the market and sells licenses via up front fee (determined in an auction), royalty or their combination. We show that if the market is covered then irrespective of the magnitude of the innovation both firms acquire the new technology and pay positive royalty and zero up-front fee. The increase in social welfare due to the innovation is totally extracted by the innovator. For the uncovered market case we show that if the consumer heterogeneity is sufficiently high, then both firms become licensees. The licensees pay positive royalty and zero up-front fee-if the value of an outside alternative option is low-and both positive royalty and positive up-front fee -- if the value of the outside alternative option is high.

Suggested Citation

  • Stamatopoulos, Giorgos & Tauman, Yair, 2008. "Licensing of a quality-improving innovation," Mathematical Social Sciences, Elsevier, vol. 56(3), pages 410-438, November.
  • Handle: RePEc:eee:matsoc:v:56:y:2008:i:3:p:410-438
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Fang, Di & Richards, Timothy & Rickard, Bradley, 2015. "Optimal Licensing of Agricultural Patents: Fees Versus Royalties," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 40(1), January.
    2. Miao, Chun-Hui, 2016. "Licensing a technology standard," International Journal of Industrial Organization, Elsevier, vol. 47(C), pages 33-61.
    3. Marie-Laure Cabon-Dhersin & Rim Lahmandi-Ayed, 2011. "R&D Organization: Cooperation or Cross-Licensing?," Recherches économiques de Louvain, De Boeck Université, vol. 77(1), pages 31-52.
    4. BHATTACHARYA, Sudipto & D’ASPREMONT, Claude & GURIEV, Sergei & SEN, Debapriya, 2012. "Cooperation in R&D: patenting, licensing and contracting," CORE Discussion Papers 2012055, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. 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.
    6. Changying Li & Junmei Wang, 2010. "Licensing a Vertical Product Innovation," The Economic Record, The Economic Society of Australia, vol. 86(275), pages 517-527, December.
    7. Sen, Debapriya, 2005. "On the coexistence of different licensing schemes," International Review of Economics & Finance, Elsevier, vol. 14(4), pages 393-413.
    8. repec:eee:proeco:v:193:y:2017:i:c:p:502-513 is not listed on IDEAS
    9. Sen, Debapriya, 2005. "Fee versus royalty reconsidered," Games and Economic Behavior, Elsevier, vol. 53(1), pages 141-147, October.
    10. Tian, Xiaoli, 2016. "Licensing a quality-enhancing innovation to an upstream firm," Economic Modelling, Elsevier, vol. 53(C), pages 509-514.
    11. Bradley J. Rickard & Timothy J. Richards & Jubo Yan, 2016. "University licensing of patents for varietal innovations in agriculture," Agricultural Economics, International Association of Agricultural Economists, pages 3-14.
    12. Yair Tauman & Debrapiya Sen, 2012. "Patents and Licenses," Department of Economics Working Papers 12-05, Stony Brook University, Department of Economics.
    13. Amir, Rabah & Encaoua, David & Lefouili, Yassine, 2014. "Optimal licensing of uncertain patents in the shadow of litigation," Games and Economic Behavior, Elsevier, pages 320-338.
    14. Zhao, Dan, 2017. "Choices and impacts of cross-licensing contracts," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 389-405.
    15. Zhao, Dan & Chen, Hongmin & Hong, Xianpei & Liu, Jingfang, 2014. "Technology licensing contracts with network effects," International Journal of Production Economics, Elsevier, vol. 158(C), pages 136-144.

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