Social Optimal Licensing of Innovations
A profit-maximizing monopolist licenses a cost-reducing innovation to downstream firms that compete strategically. Katz and Shapiro (1986) find the seemingly obvious result that "the [monopolist's] incentive to disseminate the innovation typically are too low." Instead, the author finds that the incentives are typically too high. Only if the lab is owned by more than half of the firms and does not disseminate the innovation to all member, would the incentives always be too low. Social incentives can be less than the private incentives for even one license. These changes come from relaxing previous authors' assumption that it is cost-less to install the innovation.
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