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Static Inefficiency of Compulsory Licensing: Quantity vs. Price Competition

A common argument against compulsory licensing of intellectual property maintains that it facilitates the entry of inefficient producers, which may reduce social welfare independently of any effects on R&D incentives. We study the issue in a model where the innovative firm, under the threat of compulsory licensing, react strategically by choosing between quantity and price competition. We show that the risk of a reduction in static welfare due to the entry of highly inefficient firms is avoided if licensing entails a royalty per unit of output and zero fixed fee. The rationale behind this result lies in the fact that compulsory licensing threat works as a disciplining device to improve static social welfare, even when the applicant is a high cost inefficient firm.

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Paper provided by University of Turin in its series Department of Economics and Statistics Cognetti de Martiis. Working Papers with number 200606.

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Length: 18 pages
Date of creation: Jun 2006
Date of revision:
Handle: RePEc:uto:dipeco:200606
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