Licensing in a Stackelberg industry, product differentiation, and welfare

Antelo, Manel and Bru, Lluís (2022): Licensing in a Stackelberg industry, product differentiation, and welfare.

Abstract

In a differentiated Stackelberg duopoly, we explore the licensing behaviour of an inside patent holder owning a cost-reducing innovation and that may play as a leader or follower in setting the output level in the marketplace. We find that, regardless of whether the licensor is the leader or the follower, the licensing contract always involves royalties: per-unit or ad-valorem (depending on the degree of product differentiation and the size of the innovation) when the licensor is the leading firm, and per-unit royalties (alone or combined with a fixed payment) when it is the follower. We also show that, as compared to the pre-licensing context, licensing by a market follower is never welfare reducing, and licensing by a market leader is only welfare reducing when the products are very close substitutes.

• Item Type: MPRA Paper
• Language: English
• Keywords: Stackelberg industry, licensing, differentiated products, per-unit and ad-valorem royalties, welfare
• Subjects: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L24 - Contracting Out ; Joint Ventures ; Technology Licensing

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