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Product innovation in a vertically differentiated model

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  • L. Filippini
  • C. Vergari

Abstract

We study the licensing incentives of an independent input producer owning a patented product innovation which allows the downstream firms to improve the quality of their final goods. We consider a general two-part tariff contract for both outside and incumbent innovators. We find that technology diffusion critically depends on the nature of market competition (Cournot vs. Bertrand). Moreover, the vertical merger with either downstream firm is always privately profitable and it is welfare improving for large innovations: this implies that not all profitable mergers should be rejected.

Suggested Citation

  • L. Filippini & C. Vergari, 2012. "Product innovation in a vertically differentiated model," Working Papers wp833, Dipartimento Scienze Economiche, Universita' di Bologna.
    • Handle: RePEc:bol:bodewp:wp833
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    References listed on IDEAS

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    1. 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.
    2. Sen, Debapriya & Tauman, Yair, 2007. "General licensing schemes for a cost-reducing innovation," Games and Economic Behavior, Elsevier, vol. 59(1), pages 163-186, April.
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    5. Michael L. Katz & Carl Shapiro, 1986. "How to License Intangible Property," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(3), pages 567-589.
    6. Rey, Patrick & Tirole, Jean, 2007. "A Primer on Foreclosure," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 33, pages 2145-2220, Elsevier.
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    Cited by:

    1. Antelo, Manel & Bru, Lluís, 2023. "Licensing a product innovation from an external innovator to a Stackelberg duopoly," MPRA Paper 117542, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures

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