Takeovers and licensing in spatial competition

We consider a research laboratory that owns a patented process innovation and considers the possibility to acquire either one or the two symmetric productive firms located at the opposite ends of the Hotelling line. After the takeover decisions, technology transfer takes place inside the newly created firms and through licensing to the remaining independent firms. Each takeover decision is associated with established models of licensing and competition, with no takeover representing the case of an outsider patentee, one takeover representing an incumbent patentee, and two takeovers corresponding to full monopolization. Our analysis reveals that licensing by an incumbent patentee leads to full monopolization. Consequently, the optimal merger policy prescribes to forbid all takeovers if the antitrust authority aims to maximize consumer surplus. However, if licensing could be prohibited, the optimal structure involves one takeover without licensing. This market structure enables the transfer of technology while avoiding the anticompetitive and collusive effects of the licensing contracts.