Optimal transfer of a quality-enhancing innovation in a vertical related market

Antelo, Manel and Bru, Lluís (2025): Optimal transfer of a quality-enhancing innovation in a vertical related market.

Abstract

This paper examines the commercialization of an external, quality-enhancing (product) innovation within a vertically related market, comparing outright sale and licensing. Licensing may involve a royalty of per-unit or ad valorem type and potential adopters are two downstream firms that source a core input from a single upstream supplier. The analysis reveals that the patentholder’s incentive to license the innovation, particularly through per-unit royalties, outweighs that of an outright sale. This form of technology transfer, however, is shown to potentially reduce consumer and social welfare compared to the pre-innovation state, thus providing a rationale for public policy interventions aimed at restricting royalty-based technology transfer.

• Item Type: MPRA Paper
• Language: English
• Keywords: Vertical industry, quality-enhancing product innovation, sale versus licensing, two-part tariff contracts, per-unit royalty, ad-valorem royalty, welfare
• Subjects: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O32 - Management of Technological Innovation and R&D

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