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Technology licensing under product differentiation

Author

Listed:
  • Neelanjan Sen

    (Madras School of Economics)

  • Saumya Kaul

    (Madras School of Economics)

  • Rajit Biswas

    (Centre For Development Studies)

Abstract

This paper discusses the licensing of technology between rival firms in a Cournot duopoly with horizontal and vertical product differentiation. The firms produce products of different qualities (high and low) and incur different costs per unit of output produced. It is shown that technology is transferred from the firm that produces the higher quality product to the firm that produces the lower quality product via a fixed-fee if the quality difference (net of cost) and the horizontal differentiation between the two products are relatively low. Technology is transferred through royalty, for any level of quality difference (net of cost), if the horizontal differentiation between the products is relatively low. A similar result is observed for two-part tariff licensing and quota licensing, which is a combination of output quota set by the licensor coupled with a fixed-fee. It is also shown that the optimal form of contract is either two-part tariff licensing or quota licensing. Technology is never licensed from the firm that produces a lower quality product to its rival that produces a higher quality product. However, the cross-licensing of technology is sometimes possible. After licensing welfare always increases.

Suggested Citation

  • Neelanjan Sen & Saumya Kaul & Rajit Biswas, 2021. "Technology licensing under product differentiation," Journal of Economics, Springer, vol. 134(3), pages 219-260, December.
    • Handle: RePEc:kap:jeczfn:v:134:y:2021:i:3:d:10.1007_s00712-021-00750-y
    DOI: 10.1007/s00712-021-00750-y
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    References listed on IDEAS

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    Cited by:

    1. Antelo, Manel & Bru, Lluís, 2023. "Why some product innovations are licensed and others are not?," Research in Economics, Elsevier, vol. 77(1), pages 152-158.
    2. Antelo, Manel & Bru, Lluís, 2022. "Product licensing in a Stackelberg industry," MPRA Paper 113985, University Library of Munich, Germany.
    3. Neelanjan Sen & Drishti Narula, 2022. "Merger under horizontal and vertical product differentiation," International Journal of Economic Theory, The International Society for Economic Theory, vol. 18(4), pages 509-531, December.
    4. Ku-Chu Tsao & Jin-Li Hu & Hong Hwang & Yan-Shu Lin, 2023. "More licensed technologies may make it worse: a welfare analysis of licensing vertically two-tier foreign technologies," Journal of Economics, Springer, vol. 139(1), pages 71-88, June.
    5. Neelanjan Sen & Uday Bhanu Sinha, 2023. "When to merge with a lower quality producer?," Journal of Economics, Springer, vol. 138(2), pages 165-188, March.

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    More about this item

    Keywords

    Technology licensing; Oligopoly; Product differentiation; Cournot;
    All these keywords.

    JEL classification:

    • L - Industrial Organization
    • L - Industrial Organization
    • D - Microeconomics

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