Technology Transfer and Imitation in a Cournot Oligopoly

I examine and compare patent licensing by fixed fee and unit royalty under Cournot competition. I consider licensing by an incumbent patent holder to one or two other competing firms that can obtain a patented technological improvement through technology transfer or imitation. Assuming that imitation is perfect, certain, instantaneous, and non-infringing, I analyze the effects of licensing on market structure, firms’ individual profits, and consumer surplus. This provides a theoretical framework that explains when technology licensing is superior to imitation for both firms and consumers, what is the optimal licensing choice for firms, and how imitation affects firms’ licensing behavior and competition in a highly concentrated industry. In particular, I show that licensing through a unit royalty is preferable to licensing through a fixed fee for a patent holder, while licensing through a fixed fee is at least as beneficial as licensing through a unit royalty for consumers. Moreover, the patent holder can use licensing to prevent imitation, but cannot use it selectively to affect competition, at least before the patent expires and when one of the competing firms can imitate. I contribute to the literature that considers the patent holder as a producer by showing how technology licensing can affect competition and improve consumer surplus in oligopolistic industries. This is important for policy makers to identify when technology licensing is used strategically to transfer surplus from consumers to producers.