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Decreasing returns, patent licensing and price-reducing taxes

Author

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  • Sen, Debapriya
  • Stamatopoulos, Giorgos

Abstract

Patent licensing agreements among competing firms usually involve royalties which are often considered to be anticompetitive as they raise market prices. In this paper we propose simple tax policies than can alleviate the effect of royalties. Considering a Cournot duopoly where firms produce under decreasing returns and trade a patented technology, we show that the interaction of royalties with decreasing returns may generate the counter-intuitive result that market prices decrease in the magnitude of diseconomies of scale. In such cases there exist progressive quantity taxes on firms that weaken the effect of royalties and lower the market prices. These taxes collect sufficient revenue to compensate firms for their losses. As a result, it is possible to design deficit neutral tax-transfer schemes that strictly Pareto improve the welfare of consumers as well as firms.

Suggested Citation

  • Sen, Debapriya & Stamatopoulos, Giorgos, 2013. "Decreasing returns, patent licensing and price-reducing taxes," MPRA Paper 46246, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:46246
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    File URL: https://mpra.ub.uni-muenchen.de/46246/1/MPRA_paper_46246.pdf
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    References listed on IDEAS

    as
    1. John Geanakoplos & H M Polemchakis, 2008. "Pareto Improving Taxes," Levine's Working Paper Archive 122247000000002219, David K. Levine.
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    3. Michael L. Katz & Carl Shapiro, 1986. "How to License Intangible Property," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 567-589.
    4. Geanakoplos, John & Polemarchakis, H.M., 2008. "Pareto improving taxes," Journal of Mathematical Economics, Elsevier, vol. 44(7-8), pages 682-696, July.
    5. Dennis W. Carlton & Glenn C. Loury, 1980. "The Limitations of Pigouvian Taxes as a Long-Run Remedy for Externalities," The Quarterly Journal of Economics, Oxford University Press, vol. 95(3), pages 559-566.
    6. Alan J. Auerbach & James R. Hines Jr., 2001. "Perfect Taxation with Imperfect Competition," NBER Working Papers 8138, National Bureau of Economic Research, Inc.
    7. Wang, X. Henry, 1998. "Fee versus royalty licensing in a Cournot duopoly model," Economics Letters, Elsevier, vol. 60(1), pages 55-62, July.
    8. de Meza, David & Maloney, John & Myles, Gareth D., 1995. "Price-reducing taxation," Economics Letters, Elsevier, vol. 47(1), pages 77-81, January.
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    11. Yoshiaki Ushio, 2000. "Welfare Effects of Commodity Taxation in Cournot Oligopoly," The Japanese Economic Review, Japanese Economic Association, vol. 51(2), pages 268-273, June.
    12. Konishi, Hideki & Okuno-Fujiwara, Masahiro & Suzumura, Kotaro, 1990. "Oligopolistic competition and economic welfare : A general equilibrium analysis of entry regulation and tax-subsidy schemes," Journal of Public Economics, Elsevier, vol. 42(1), pages 67-88, June.
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    Cited by:

    1. Stefano Colombo & Luigi Filippini, 2016. "Revenue royalties," Journal of Economics, Springer, vol. 118(1), pages 47-76, May.

    More about this item

    Keywords

    Decreasing returns; patent licensing; royalty; progressive quantity tax; deficit neutrality;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures

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