Goldilocks and the Licensing Firm: Choosing a Partner when Rivals are Heterogeneous

Markets are often characterized with firms of differing capabilities with more efficient firms licensing their technology to lesser firms. We examine the effects that the amount of the technology transferred, and the characteristics of the partner have on this licensing. We find that a partial technology transfer can be the joint-profit minimizing transfer; no such transfer then is superior. However, under weakly concave demand, a complete transfer always increases joint profits so long as there are at least three firms in the industry. We also establish a "Goldilocks" condition in partner selection: it is neither too efficient nor too inefficient. Unfortunately, profitable transfers between sufficiently inefficient firms reduce welfare, while transfers from relatively efficient firms increase welfare. However, an efficient firm might not select the least efficient partner, though it is the social-welfare-maximizing partner.