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Cost asymmetry and vertical product licensing

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  • Ray-Yun Chang
  • Cheng-Hau Peng

Abstract

This paper investigates the optimal licensing contract for a product innovation in a vertically differentiated duopoly. The two firms have different marginal costs and the high-quality firm can license its technology on product quality to the low-quality firm. It is found that the optimal form of licensing contract depends on the relative marginal costs of the two firms. If the marginal cost of the high-quality firm is relatively high (low), fixed-fee licensing is superior (inferior) to royalty licensing from the viewpoint of the licensor. Surprisingly, consumers are worse off if the quality difference between the two firms is small. This result is in contrast to the received wisdom in the product licensing literature.

Suggested Citation

  • Ray-Yun Chang & Cheng-Hau Peng, 2013. "Cost asymmetry and vertical product licensing," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 20(3), pages 270-280, September.
  • Handle: RePEc:taf:raaexx:v:20:y:2013:i:3:p:270-280
    DOI: 10.1080/16081625.2013.782809
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    File URL: http://hdl.handle.net/10.1080/16081625.2013.782809
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    Cited by:

    1. Ping-Sing Kuo & Yan-Shu Lin & Cheng-Hau Peng, 2016. "International Technology Transfer and Welfare," Review of Development Economics, Wiley Blackwell, vol. 20(1), pages 214-227, February.
    2. Chen, Hsiu-Li & Hwang, Hong & Mukherjee, Arijit & Shih, Pei-Cyuan, 2016. "Tariffs, technology licensing and adoption," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 234-240.

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