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Better technology may be sold for a lower fee: The ad valorem tariff and licensing contract

Author

Listed:
  • Tomomichi Mizuno

    () (Department of Economics, University of Nagasaki)

  • Kazuhiro Takauchi

    () (Department of Economics, Management and Information Science)

  • Takeshi Iida

    (Graduate School of Economics, Kobe University)

Abstract

The main purpose of this study is to investigate how a relationship arises between an ad valorem tariff and licensed technology in a licensing contract. To this end, we study a two-country, two-firm duopolistic trade model. We consider a product market in which a high-tech foreign firm can license its production technology to an importing country. The government of the importing country chooses an ad valorem tariff rate but has no commitment power. In our model, the home government raises the tariff rate as the licensed technology improves. Our two main results in the case that a highly productive technology is licensed are paradoxical: First, better technology is sold for a lower fee in a licensing contract. Second, the profits of both the licenser and licensee decrease as the licensed technology improves. In other words, cost reduction reduces the profits of both the licenser and licensee. These findings indicate that because of the role played by the ad valorem tariff, technology licensing does not always benefit both the licensee and the licenser.

Suggested Citation

  • Tomomichi Mizuno & Kazuhiro Takauchi & Takeshi Iida, 2011. "Better technology may be sold for a lower fee: The ad valorem tariff and licensing contract," Discussion Papers 1109, Graduate School of Economics, Kobe University.
  • Handle: RePEc:koe:wpaper:1109
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    File URL: http://www.econ.kobe-u.ac.jp/RePEc/koe/wpaper/2011/1109.pdf
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    References listed on IDEAS

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    1. Delipalla, Sofia & Keen, Michael, 1992. "The comparison between ad valorem and specific taxation under imperfect competition," Journal of Public Economics, Elsevier, vol. 49(3), pages 351-367, December.
    2. Neary, J Peter & Leahy, Dermot, 2000. "Strategic Trade and Industrial Policy towards Dynamic Oligopolies," Economic Journal, Royal Economic Society, vol. 110(463), pages 484-508, April.
    3. David R. Collie, 2006. "Tariffs And Subsidies Under Asymmetric Oligopoly: Ad Valorem Versus Specific Instruments," Manchester School, University of Manchester, vol. 74(3), pages 314-333, June.
    4. Arijit Mukherjee, 2010. "Competition And Welfare: The Implications Of Licensing," Manchester School, University of Manchester, vol. 78(1), pages 20-40, January.
    5. Eiji Horiuchi & Jota Ishikawa, 2009. "Tariffs and Technology Transfer through an Intermediate Product," Review of International Economics, Wiley Blackwell, vol. 17(SI), pages 310-326, May.
    6. Kaz Miyagiwa, 2009. "Saving Dolphins: Boycotts, Trade Sanctions, And Unobservable Technology," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(3), pages 883-902, August.
    7. Kabiraj, Tarun & Marjit, Sugata, 2003. "Protecting consumers through protection: The role of tariff-induced technology transfer," European Economic Review, Elsevier, vol. 47(1), pages 113-124, February.
    8. Mukherjee, Arijit & Pennings, Enrico, 2006. "Tariffs, licensing and market structure," European Economic Review, Elsevier, vol. 50(7), pages 1699-1707, October.
    9. Gareth Myles, 1996. "Imperfect competition and the optimal combination of ad valorem and specific taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 3(1), pages 29-44, January.
    10. Koon Lam Shea & Esther Y. P. Shea, 2006. "On the Equivalence of Ad Valorem Tariffs and Specific Tariffs under Duopoly," Review of International Economics, Wiley Blackwell, vol. 14(3), pages 445-451, August.
    11. Staiger, Robert W & Tabellini, Guido, 1987. "Discretionary Trade Policy and Excessive Protection," American Economic Review, American Economic Association, vol. 77(5), pages 823-837, December.
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    Cited by:

    1. Stefano Colombo & Luigi Filippini, 2015. "Patent Licensing with Bertrand Competitors," Manchester School, University of Manchester, vol. 83(1), pages 1-16, January.

    More about this item

    Keywords

    Licensing contract; Ad valorem tariff; Fixed fee;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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