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Cost Reduction, Licensing and Incentive to Innovate: A Note

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  • Luigi Filippini

Abstract

In this Note we consider an economy composed by two firms; a leader and a follower, that invest in R&D for process innovations. Competition to innovate is usually modelled as a two stage game. In the first stage of the game both firms simultaneously reduces their production costs. In the second stage the firms compete la Stackelberg and it is possible to prove that the profits of one of the two firms (and total profits) might decrease in a range of parameters. Then we consider the possibility of technology transfer from the leader that has the most productive technology to the follower under licensing by means of a fixed fee and of a royalty. It is possible to prove that under licensing total profits will increase in some range of parameters above mentioned in comparison to the pre-innovation case.

Suggested Citation

  • Luigi Filippini, 2002. "Cost Reduction, Licensing and Incentive to Innovate: A Note," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 11(1), pages 51-59.
  • Handle: RePEc:taf:ecinnt:v:11:y:2002:i:1:p:51-59
    DOI: 10.1080/10438590210893
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    References listed on IDEAS

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    1. Morton I. Kamien & Yair Tauman, 1986. "Fees Versus Royalties and the Private Value of a Patent," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 471-491.
    2. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters,in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc.
    3. Seade, J, 1985. "Profitable Cost Increases and the Shifting of Taxation : Equilibrium Response of Markets in Oligopoly," The Warwick Economics Research Paper Series (TWERPS) 260, University of Warwick, Department of Economics.
    4. Michael L. Katz & Carl Shapiro, 1986. "How to License Intangible Property," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 567-589.
    5. Salvadori, Neri, 1981. "Falling Rate of Profit with a Constant Real Wage: An Example," Cambridge Journal of Economics, Oxford University Press, vol. 5(1), pages 59-66, March.
    6. Katz, Michael L & Shapiro, Carl, 1987. "R&D Rivalry with Licensing or Imitation," American Economic Review, American Economic Association, vol. 77(3), pages 402-420, June.
    7. Fudenberg, Drew & Gilbert, Richard & Stiglitz, Joseph & Tirole, Jean, 1983. "Preemption, leapfrogging and competition in patent races," European Economic Review, Elsevier, vol. 22(1), pages 3-31, June.
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    Cited by:

    1. 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).
    2. Debapriya Sen & Giorgos Stamatopoulos, 2009. "Technology Transfer Under Returns To Scale," Manchester School, University of Manchester, vol. 77(3), pages 337-365, June.

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    Keywords

    Duopoly; Process Innovation; Licensing;

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