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Patent Licensing, Entry and the Incentive to Innovate

Listed author(s):
  • Yair Tauman
  • Chang Zhao

We analyze the economic impact of process innovations where the innovator auctions off licenses to both potential entrants and incumbent firms. It is shown that opening the market to entrant licensees, the incentive to innovate is maximized in a monopoly market as was envisioned by Schumpeter (1942). This is in contrast to previous literature on licensing of process innovations where entry is excluded. There the incentive to innovate is maximized in oligopoly market if licenses are sold by auction (Sen and Tauman (2007)) or in competitive market if licenses are sold by royalty (Arrow (1962)). The post-innovation market structure, the diusion of the innovation and the social welfare are analyzed and compared with the case where entry is excluded.

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File URL: http://www.stonybrook.edu/commcms/economics/research/papers/2017/Tauman_Zhao2017.pdf
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Paper provided by Stony Brook University, Department of Economics in its series Department of Economics Working Papers with number 17-05.

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Date of creation: 2017
Handle: RePEc:nys:sunysb:17-05
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Stony Brook, NY 11794-4384

Phone: (631)632-7540
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Web page: http://www.stonybrook.edu/commcms/economics/
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  1. 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.
  2. Morton I. Kamien & Yair Tauman, 1986. "Fees Versus Royalties and the Private Value of a Patent," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 471-491.
  3. Michael L. Katz & Carl Shapiro, 1985. "On the Licensing of Innovations," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 504-520, Winter.
  4. Heidrun C. Hoppe & Philippe Jehiel & Benny Moldovanu, 2006. "License Auctions and Market Structure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(2), pages 371-396, 06.
  5. Michael L. Katz, 1986. "An Analysis of Cooperative Research and Development," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 527-543, Winter.
  6. Kamien, Morton I. & Oren, Shmuel S. & Tauman, Yair, 1992. "Optimal licensing of cost-reducing innovation," Journal of Mathematical Economics, Elsevier, vol. 21(5), pages 483-508.
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