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Vertical Integration and Patent Licensing in Upstream and Downstream Markets

  • Bouguezzi, Fehmi
  • EL ELJ, Moez

The present paper studies and compares different vertical integration structures on consumers and total surplus with licensing by mean of a fixed fee in two successive homogeneous-good Cournot duopolies where one of the firms in each market has a different cost-reducing innovation. The key difference between the present model and models in the existing literature is that here we suppose the existence of two different patents in upstream and downstream markets. In each market we find two firms: the patent holding firm and a non innovative firm. In upstream market, the innovative firm owns an innovation allowing to reduce the input marginal production cost. In downstream market the innovative firm owns an innovation allowing to reduce marginal cost of transforming the input into output. We discuss different structures of vertical integration and we show that consumer surplus and total surplus are depending of cost-reducing innovation in upstream and downstream markets and the structure of vertical integration.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 22212.

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Date of creation: 03 Jun 2009
Date of revision:
Handle: RePEc:pra:mprapa:22212
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  1. Fauli-Oller, Ramon & Sandonis, Joel, 2003. "To merge or to license: implications for competition policy," International Journal of Industrial Organization, Elsevier, vol. 21(5), pages 655-672, May.
  2. van Triest, Sander & Vis, Wim, 2007. "Valuing patents on cost-reducing technology: A case study," International Journal of Production Economics, Elsevier, vol. 105(1), pages 282-292, January.
  3. Schmidt, Klaus M., 2006. "Licensing Complementary Patents and Vertical Integration," CEPR Discussion Papers 5987, C.E.P.R. Discussion Papers.
  4. Wang, X. Henry, 1998. "Fee versus royalty licensing in a Cournot duopoly model," Economics Letters, Elsevier, vol. 60(1), pages 55-62, July.
  5. Sandonis, Joel & Fauli-Oller, Ramon, 2006. "On the competitive effects of vertical integration by a research laboratory," International Journal of Industrial Organization, Elsevier, vol. 24(4), pages 715-731, July.
  6. repec:oup:qjecon:v:101:y:1986:i:3:p:567-89 is not listed on IDEAS
  7. Lemarié, S., 2005. "Vertical integration and the licensing of innovation with a fixed fee or a royalty," Working Papers 200517, Grenoble Applied Economics Laboratory (GAEL).
  8. 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.
  9. Stefan Buehler & Armin Schmutzler, 2004. "Intimidating Competitors – Endogenous Vertical Integration and Downstream Investment in Successive Oligopoly," SOI - Working Papers 0409, Socioeconomic Institute - University of Zurich, revised Jul 2005.
  10. Brocas, Isabelle, 2003. "Vertical integration and incentives to innovate," International Journal of Industrial Organization, Elsevier, vol. 21(4), pages 457-488, April.
  11. David Encaoua & Yassine Lefouili, 2006. "Choosing Intellectual Protection: Imitation, Patent Strength and Licensing," CESifo Working Paper Series 1715, CESifo Group Munich.
  12. Arijit Mukherjee2 & Piercarlo Zanchettin, 2007. "Vertical integration and product innovation," Discussion Papers in Economics 07/12, Department of Economics, University of Leicester.
  13. repec:ebl:ecbull:v:4:y:2002:i:6:p:1-6 is not listed on IDEAS
  14. repec:oup:qjecon:v:101:y:1986:i:3:p:471-91 is not listed on IDEAS
  15. Henry Wang, X., 2002. "Fee versus royalty licensing in a differentiated Cournot duopoly," Journal of Economics and Business, Elsevier, vol. 54(2), pages 253-266.
  16. Sharmila Vishwasrao, 2004. "Royalties vs. fees: How do firms pay for foreign technology?," Working Papers 04023, Department of Economics, College of Business, Florida Atlantic University, revised Sep 2006.
  17. L. Lambertini & G. Rossini, 2003. "Vertical Integration and Differentiation in an Oligopoly with Process Innovating R&D," Working Papers 468, Dipartimento Scienze Economiche, Universita' di Bologna.
  18. Sen, Debapriya, 2005. "Fee versus royalty reconsidered," Games and Economic Behavior, Elsevier, vol. 53(1), pages 141-147, October.
  19. Matsushima, Noriaki, 2004. "Technology of upstream firms and equilibrium product differentiation," International Journal of Industrial Organization, Elsevier, vol. 22(8-9), pages 1091-1114, November.
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