Tariffs, Licensing Contracts, and Consumers' Welfare

In a duopolistic trade model we have shown that a tariff can influence the optimal licensing strategy of the foreign firm. A high tariff will induce fee licensing and a low tariff will result in a royalty licensing. From the viewpoint of the consumers both high tariff and high royalty are distortaionary; hence there is a trade-off between a tariff and a royalty. Then the local government can suitably choose a tariff rate that will induce fee licensing, then consumers' welfare is maximized. In the paper we have used the tools and techniques of game theory and industrial organization literature to the issue of technology licensing and consumers' welfare. We have shown that a tariff on foreign products can be strategically chosen so that the foreign firm transfers its superior technology to a domestic firm under a fee licensing contract and consumers' welfare is maximized.