Welfare reducing vertical licensing in the presence of complementary inputs

This research explores the welfare implications of vertical licensing when the final goods are produced by multiple complementary inputs. We spotlight the importance of two-part tariff input terms when there is a buyer–seller relationship after vertical licensing, which has different welfare ramifications depending on the product differentiation. When the products are less differentiated, our result shows welfare improving licensing, but when the products are more differentiated, the wholesale price is set above the supplier’s marginal cost through licensing, leading to the problem of double marginalization and reducing welfare. This study offers various policy implications, which go up against conventional wisdom that welfare improving licensing may not be attainable by considering multiple complementary inputs.