Licensing the market for technology
Ashish Arora2003, Journal of Economic Behavior & Organization
Sign up for access to the world's latest research
checkGet notified about relevant papers
checkSave papers to use in your research
checkJoin the discussion with peers
checkTrack your impact
Abstract
In technology-based industries, incumbent firm often license their technology to potential competitors. Such a strategy is difficul to explain within traditional models of licensing. This paper extends the literature on licensing by relaxing the assumption of a monopolist technology holder. Competition in the market for technology induces licensing of innovations and incumbent firm may fin it privately profitabl to license although their joint profit may well be higher in the absence of any licensing. A strong testable implication of our model is that the number of licenses per patent holder decreases with the degree of product differentiation.
Related papers
Technology licensing in a differentiated oligopoly
We show the effects of product differentiation and competition on technology licensing by an outside innovator. Both the innovator and the society are better off under royalty licensing compared to auction (or fixed-fee) if the number of potential licensees is sufficiently large, irrespective of Cournot and Bertrand competition. We find that the relationship between product differentiation and the minimum number of potential licensees that is required to make royalty licensing profitable to the innovator is non-monotonic under Cournot competition, while it is positive under Bertrand competition. Hence, there are degrees of product differentiation for which neither the innovator nor the antitrust authority requires information about the type of product market competition while deciding on the licensing contract. It follows from our analysis that the innovator prefers auction plus royalty licensing (or fixed-fee plus royalty) over either royalty licensing or auction.
Licensing in the Presence of Competing Technologies
SSRN Electronic Journal, 2000
In technology-based industries, many incumbent fIrms license their technology to other fIrms that will potentially compete with them. Such a strategy is diffIcult to explain within traditional models of licensing. This paper extends the literature on licensing by relaxing the widespread assumption of a "unique" technology holder. We develop a model with many technological trajectories for the production of a differentiated good. We fmd that competition in the market for technology induces licensing of innovations, and that the number of licenses can be ineffIciently large. A strong testable implication of our theory is that the number of licenses per patent holder decreases with the degree of product differentiation.
Patent Licensing Revisited: Heterogeneous Firms and Product Differentiation
SSRN Electronic Journal, 2003
In this paper we study the optimal licensing agreement between a patentholder of a costreducing innovation and firms that have heterogeneous uses for the new technology. We consider the case in which these firms are competitors in a downstream market. We extend the competition environment among the licensees beyond the Cournot/Bertrand models considered by the previous literature to a framework with differentiated products. We also assume that potential licensees have private information about the usefulness of the new technology. We characterize two purposes the optimal licensing contract serves to the patentholder: separation of the licensees and competition softening in the downstream market. We also describe how the optimal contract changes with the degree of product differentiation.
Technology licensing in mixed oligopoly
International Review of Economics & Finance, 2014
We develop a mixed oligopoly model with one public firm and two private firms to explore the licensing strategy considered by the innovated private firm. The major findings of our paper are that: firstly, if the patentee licenses the public firm under some plausible parametric range, the public firm will not accept the technology licensing offer from the private firm; secondly, if the public firm accepts the licensing, all of the three different types of licensing contracts (royalty, fixed-fee and two-part tariff) can be the same optimal licensing contracts; thirdly, if the patentee licenses to another private firm, fixed-fee licensing will be the optimal choice for the patentee; finally, licensing to the public firm and another private firm simultaneously is not the best strategy for the patentee when the original cost difference between public and private firms is large. Our results are quite different from the previous on the licensing strategy among private firms.
Patents and Licenses
This article considers the problem of patent licensing in a Cournot oligopoly under a class of general demand functions. We consider two cases, the case where the innovator is an outsider and the one where it is one of the incumbent firms. The licensing policies considered are upfront fees, royalties and combinations of the two. It is shown that (i) for generic values of magnitudes of the innovation, a royalty policy is better than fee or auction provided the industry size is relatively large, (ii) under combinations of fees and royalties, provided the innovation is relatively significant (or the industry size is relatively large), (a) there is always an optimal policy where the innovation is licensed to practically all firms of the industry and (b) any optimal combination includes a positive royalty.
A Macroeconomic Model of Imperfect Competition with Patent Licensing
The B.E. Journal of Economic Analysis & Policy
This paper sets up an imperfectly competitive macroeconomic model that features the strategic interaction between the patent-holding firm and licensees, and uses it to analyze the relevant macro-variables under various licensing arrangements. Some main findings emerge from the analysis. First, the equilibrium aggregate output and aggregate consumption under fixed-fee and royalty licensing regimes are always greater than those under the no licensing regime. Moreover, the equilibrium aggregate output and consumption under the fixed-fee licensing regime are always greater than those under the royalty licensing regime. Second, with the higher (lower) technology level the patent holder prefers the fixed-fee (royalty) contract. Third, welfare could be improved through technology transfer, and the level of welfare under the fixed-fee licensing regime is higher than that under the royalty licensing regime. Lastly, this paper discusses some extensions of the baseline model.
Partial Licensing of Product Innovations
SSRN Electronic Journal, 2000
We consider a product with modular design, which enables the innovator to license its product innovation "partially." The size of the license determines the size of common component in the competing products, which in turn affect competition through the degree of differentiation. Therefore, by choosing how much to license, the innovator chooses how much to compete. We show that the equilibrium size of the license i) weakly increases with the entrant development cost, and ii) weakly decreases with the marginal effect of the size of the license on product differentiation.
Licensing of a drastic innovation and multiplicity of optimal licensing policies
This paper considers the licensing of a drastic cost-reducing innovation by an outside innovator in an n-firm Cournot oligopoly under a broad class of general demand functions. We show that when the innovator uses combinations of upfront fees and royalties, there are either n − 1 or n optimal licensing policies, each one corresponding to a different equilibrium number of active firms. Moreover, all of these policies, except one, include both positive royalties and positive fees. Under any optimal policy, the Cournot price equals the post-innovation monopoly price, the innovator's payoff is the post-innovation monopoly profit and each firm obtains zero net payoff.
General licensing schemes for a cost-reducing innovation
RePEc: Research Papers in Economics, 2002
Two general forms of standard licensing policies are considered for a non-drastic cost-reducing innovation: (a) combination of an upfront fee and uniform linear royalty, and (b) combination of auction and uniform linear royalty. It is shown that in an oligopoly, the total reduction in the cost due to the innovation for the pre-innovation competitive output forms the lower bound of the payoffs of both outsider and incumbent innovators. Further, the private value of the patent is increasing in the magnitude of the innovation, while the Cournot price and the payoff of any other firm fall below their respective pre-innovation levels. Sufficiently significant innovations from an outsider innovator are licensed exclusively to a single firm. Otherwise, all other firms, except perhaps one, become licensees. The dissemination of the innovation is generally higher with an incumbent innovator compared to an outsider. For both outsider and incumbent innovators, the monopoly does not provide the highest incentive to innovate; for sufficiently insignificant innovations, it is the duopoly that does so, and, the industry size that provides the highest incentive increases with the magnitude of the innovation. Finally, it is argued that significant innovations are more likely to occur when the innovator is an incumbent firm.
Patent Protection, Complementary Assets, and Firms’ Incentives for Technology Licensing
Management Science, 2006
This paper analyzes the relationship between technology licensing and the effectiveness of patent protection. Using the 1994 Carnegie Mellon survey on industrial research and development (R&D) in the United States, we develop and test a simple structural model in which the patenting and licensing decisions are jointly determined. We find that increases in the effectiveness of patent protection increases licensing propensity, but only when the firm lacks specialized complementary assets required to commercialize new technologies. In contrast, for firms with specialized complementary assets, increases in patent effectiveness increase patenting propensity but reduce the propensity to license. We present systematic cross-industry empirical support for the proposition that intellectual property protection is a key determinant of the vertical boundaries of the firm and the market for technology but that its impact is mediated by a firm’s ownership of specialized complementary assets.
Related papers
Licensing and Patent Protection
2010
We show the impact of technology licensing on optimal patent policy. Strong patent protection that eliminates imitation may not be the equilibrium outcome in the presence of licensing. Depending on the cost of innovation, licensing may either increase or reduce the strength of the patent protection.
Inventions under Siege? The Impact of Technology Competition on Licensing
SSRN Electronic Journal, 2000
In recent years, firms have increasingly contributed to and been confronted with a patent landscape characterized by numerous but marginal inventions, overlapping claims and patent fences. Literature suggests that both the fragmentation of ownership and the threat of a firm's patent applications being blocked by competitors' patents lead to increased patenting and inlicensing activity. In this paper, we investigate the effect of expected blocking on firms' engagement in in-and out-licensing. Based on a sample of more than 400 German manufacturing firms our results show that firms engage in in-and out-licensing if technology competition increases which is in line with the argument that licensing can mitigate hold-up problems in technology markets.
Patent licensing in a Cournot oligopoly: General results
Mathematical Social Sciences
This paper presents a comprehensive analysis of patent licensing in a Cournot oligopoly with general demand and looks at both outside and incumbent innovators. The licensing policies considered are upfront fees, unit royalties and combinations of fees and royalties (FR policies). It is shown that (i) royalties unambiguously ensure full diffusion of the innovation while diffusion is limited under upfront fees, (ii) the Cournot price is higher under royalties compared to upfront fees and the price could even exceed the post-innovation monopoly price, (iii) for generic values of magnitudes of the innovation, when the industry size is relatively large, royalties are superior to upfront fees for the innovator and (iv) for any m, there is always a non empty subset of m-drastic innovations such that for relatively large industry sizes, upfront fee policy results in higher consumer surplus as well as welfare compared to both royalty and FR policies.
Licensing and Imitation in Product-Differentiated Markets
The paper examines the optimal license contract with and without imitation, the optimal choice of the quality of licensed technology in product-differentiated markets. Suppose patent disclosure enables imitation, a license contract with a lower fixed fee may discourage imitation.
Licensing under vertical product differentiation: Price vs. quantity competition
Economic Modelling, 2014
This paper develops a duopoly model of vertical product differentiation where two domestic firms incur variable costs of quality development. These domestic firms can purchase a superior foreign technology through licensing. Outcomes between Bertrand and Cournot competition are compared. We find that licensing raises domestic welfare, and domestic welfare is higher in Bertrand than in Cournot competition regardless of whether or not domestic firms engage in licensing. Non-exclusive licensing is also found to benefit the domestic country more than exclusive licensing.
Technology Licensing between Rival Firms in Presence of Asymmetric Information
The B.E. Journal of Theoretical Economics, 2017
This paper investigates the possibility of licensing between rival firms in a Cournot duopoly market. Unlike Heywood, Li, and Ye (2014. “Per Unit vs. Ad Valorem Royalties under Asymmetric Information.” International Journal of Industrial Organization 37:38–46), the cost information of the licensee is private in the pre-licensing stage. If inspection of the licensee’s technology is not possible by the licensor i) technology is never transferred from the low-cost firm (licensor) to the high-cost firm (licensee) via fixed-fee and ii) in the case of royalty licensing technology will be transferred only if the cost difference between the firms is sufficiently high. Moreover, under fixed-fee and royalty licensing, the licensee will always allow the licensor to inspect its technology, if inspection is possible. If inspection is undertaken by the licensor, technology will be transferred i) if the cost difference is low via fixed fee and ii) always via royalty.
Patent Licensing and Double Marginalization in Vertically-related Markets
2013
This paper develops a three-stage model in which the input price is expressed by a combination of its monopoly input price and marginal cost. The focus of this paper is on the role of the upstream firm in terms of the degree of its monopoly power in the choice of the outsider patentee's optimal licensing contract, as the outsider patentee licenses its innovation to the upstream firm. The paper shows that the outsider patentee prefers royalty (fixed-fee) licensing to fixed-fee (royalty) licensing when the degree of the upstream firm's monopoly power is small (large) regardless of the innovation size. This paper shows that a rise in the degree of double-marginalization may improve the social welfare through the outsider patentee's switching from royalty licensing to fixed-fee licensing. It also proves that social welfare remains unchanged by the elimination of double-marginalization when the innovation size is large. Finally, the paper is extended by taking into account a ...
Licensing strategy for a stochastic R&D firm in a differentiated Cournot duopoly model
Engineering Economics, 2015
Nowadays firms are increasingly licensing out technology, either as an outside licensor or as an inside licensor. However, extant literature on firm's technology innovation usually assumes that the R&D outcome is certain, which does not hold in many real-world situations. To fill this gap, this paper investigates an innovating firm's licensing strategy in a differentiated Cournot duopoly model when the firm is an insider and the R&D outcome is stochastic. We develop a duopoly game model in which the innovating firm has three options for licensing its innovation: fixed-fee licensing, royalty licensing and two-part tariff licensing. We consider three stages in the model: the R&D, licensing and output stages. We find that product differentiation and technology spillover play significant roles in the innovating firm's choice between fixed-fee and royalty licensing. In addition, regardless of the degree of product differentiation, we find that (1) two-part tariff licensing is superior to both fixed-fee and royalty licensing when technology spillover is low and that (2) two-part tariff licensing is equivalent to royalty licensing when technology spillover is high.
Optimal Licensing of Technology in the Face of (Asymmetric) Competition
SSRN Electronic Journal, 2017
We reconsider the optimal licensing of technology by an incumbent firm in the presence of multiple potential licensees. In a first step we show that competition among potential licensees has a drastic effect on optimal two-part tariff contracts. We then introduce more general mechanisms and design a dynamic mechanism that extracts the maximum industry profit while reducing the potential licensees' payoff to the minimum level that they can assure themselves. That mechanism can be viewed as a generalized "chutzpah" mechanism, generalized because it employs royalties to maximize the industry profit. It awards licenses to all firms and prescribes maximum permitted royalty rates plus positive fixed fees.
Technology licensing under optimal tax policy
Journal of Economics, 2013
This paper examines the role of government policy in technology licensing decision. We show that both the outside and the inside innovators license a new product (or drastic process innovation) to all potential licensees in the presence of tax/subsidy policies. An implication of our analysis is that a monopolist producer may prefer technology licensing in a homogeneous goods industry. Our results also provide a rationale for franchising to multiple sellers.
Loading Preview
Sorry, preview is currently unavailable. You can download the paper by clicking the button above.