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How to license a downstream technology when upstream firms are capacity constrained?

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  • SCHOLZ Eva-Marie

    (Université catholique de Louvain, CORE, Belgium)

Abstract

In this paper, we study the relationship between capacity constraints and licensing strategies. To doso, we focus on the licensing strategy of an outside innovator who licenses a process innovation to the downstream sector of a vertical Cournot oligopoly. Downstream firms soruce an essential production factor from a capacity constrained upstream sector. In this setting, we show that the innovator optimally licenses large innovations via per-unit royalty contracts and small innovations via fixed fee contracts. Moreover, an increase in the strength of the capacity constraints makes it more likely that hte optimal licensing contract includes a strictly positive per-unit royalty rate. As a final point, we discuss the relationship between capacity constraints and the social optimality of the innovator’s licensing strategy as measured by aggregate welfaore or the diffusion of the innovation on the downstream market

Suggested Citation

  • SCHOLZ Eva-Marie, 2017. "How to license a downstream technology when upstream firms are capacity constrained?," LIDAM Discussion Papers CORE 2017004, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2017004
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    File URL: https://sites.uclouvain.be/core/publications/coredp/coredp2017.html
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    More about this item

    Keywords

    capacity constraints; licensing contracts; vertical Cournot oligopoly;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital

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