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Vertical Integration and Patent Licensing in Upstream and Downstream Markets

  • Fehmi Bouguezzi

    ()

    (Faculty of Management and Economic Sciences of Tunis, Laboratory of Economics and Industrial Management EPT - Polytechnic School of Tunisia)

  • Moez El Elj

    ()

    (ISG - High Institute of Management, Laboratory of Economics and Industrial Management EPT - Polytechnic School of Tunisia)

The present paper studies and compares different vertical integration structures on consumers and total surplus with licensing by mean of a fixed fee in two successive homogeneous-good Cournot duopolies where one of the firms in each market has a different cost-reducing innovation. The key difference between the present model and models in the existing literature is that here we suppose the existence of two different patents in upstream and downstream markets. In each market we find two firms: the patent holding firm and a non-innovative firm. In upstream market, the innovative firm owns an innovation reducing the input marginal production cost. In downstream market the innovative firm owns an innovation reducing marginal cost of transforming the input into output. We discuss different structures of vertical integration and we show that consumer surplus and total surplus are depending of cost-reducing innovation in upstream and downstream markets and the structure of vertical integration.

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Article provided by ASERS Publishing in its journal Journal of Advanced Research in Management.

Volume (Year): I (2010)
Issue (Month): 1 (June)
Pages: 4-17

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Handle: RePEc:srs:jarm12:1:v:1:y:2010:i:1:p:4-17
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  1. Buehler, Stefan & Schmutzler, Armin, 2008. "Intimidating competitors -- Endogenous vertical integration and downstream investment in successive oligopoly," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 247-265, January.
  2. David Encaoua & Yassine Lefouili, 2006. "Choosing intellectual protection : imitation, patent strength and licensing," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00115666, HAL.
  3. repec:ebl:ecbull:v:4:y:2002:i:6:p:1-6 is not listed on IDEAS
  4. Lemarié, S., 2005. "Vertical integration and the licensing of innovation with a fixed fee or a royalty," Working Papers 200517, Grenoble Applied Economics Laboratory (GAEL).
  5. Brocas, Isabelle, 2003. "Vertical integration and incentives to innovate," International Journal of Industrial Organization, Elsevier, vol. 21(4), pages 457-488, April.
  6. Kamien, Morton I & Tauman, Yair, 1986. "Fees versus Royalties and the Private Value of a Patent," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 471-91, August.
  7. Wang, X. Henry, 1998. "Fee versus royalty licensing in a Cournot duopoly model," Economics Letters, Elsevier, vol. 60(1), pages 55-62, July.
  8. Matsushima, Noriaki, 2004. "Technology of upstream firms and equilibrium product differentiation," International Journal of Industrial Organization, Elsevier, vol. 22(8-9), pages 1091-1114, November.
  9. Sharmila Vishwasrao, 2004. "Royalties vs. fees: How do firms pay for foreign technology?," Working Papers 04023, Department of Economics, College of Business, Florida Atlantic University, revised Sep 2006.
  10. Katz, Michael L & Shapiro, Carl, 1986. "How to License Intangible Property," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 567-89, August.
  11. Schmidt, Klaus M., 2006. "Licensing Complementary Patents and Vertical Integration," CEPR Discussion Papers 5987, C.E.P.R. Discussion Papers.
  12. Arijit Mukherjee2 & Piercarlo Zanchettin, 2007. "Vertical integration and product innovation," Discussion Papers in Economics 07/12, Department of Economics, University of Leicester.
  13. L. Lambertini & G. Rossini, 2003. "Vertical Integration and Differentiation in an Oligopoly with Process Innovating R&D," Working Papers 468, Dipartimento Scienze Economiche, Universita' di Bologna.
  14. van Triest, Sander & Vis, Wim, 2007. "Valuing patents on cost-reducing technology: A case study," International Journal of Production Economics, Elsevier, vol. 105(1), pages 282-292, January.
  15. Henry Wang, X., 2002. "Fee versus royalty licensing in a differentiated Cournot duopoly," Journal of Economics and Business, Elsevier, vol. 54(2), pages 253-266.
  16. Sandonis, Joel & Fauli-Oller, Ramon, 2006. "On the competitive effects of vertical integration by a research laboratory," International Journal of Industrial Organization, Elsevier, vol. 24(4), pages 715-731, July.
  17. Fauli-Oller, Ramon & Sandonis, Joel, 2003. "To merge or to license: implications for competition policy," International Journal of Industrial Organization, Elsevier, vol. 21(5), pages 655-672, May.
  18. Sen, Debapriya, 2005. "Fee versus royalty reconsidered," Games and Economic Behavior, Elsevier, vol. 53(1), pages 141-147, October.
  19. 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.
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