Licensing of a lower-cost production process to an asymmetric Cournot duopoly

Rtischev, Dimitry (2009): Licensing of a lower-cost production process to an asymmetric Cournot duopoly. Published in: Gakushuin Economic Papers , Vol. 45, No. 4 (January 2009): pp. 325-336.

Abstract

An outside inventor of a new production process seeks to license it to Cournot duopolists which have unequal ex ante costs. Distinguishing "leading-edge" innovations (new cost below both firms' costs) from "catch-up" innovations (new cost between the two firms' costs), we compare the equilibria of two license-selling mechanisms: exclusive license auction and non-exclusive price-setting. In contrast to the often-studied case of an innovation that reduces the cost of any licensee by the same amount, we show that licensing of a new process may attenuate the ex ante cost asymmetry, allow the inefficient firm to leapfrog its competitor, and raise the licensee's net profits.

• Item Type: MPRA Paper
• Language: English
• Keywords: cost-reducing innovation; technology licensing
• Subjects: D - Microeconomics > D4 - Market Structure, Pricing, and Design > D45 - Rationing ; Licensing; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L24 - Contracting Out ; Joint Ventures ; Technology Licensing; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O31 - Innovation and Invention: Processes and Incentives

References

Aseff, J., Chade H., 2008. An optimal auction with identity-dependent externalities. RAND Journal of Economics 39:3, 731-746

Das Varma, G., 2002. Standard auctions with identity-dependent externalities. RAND Journal of Economics 33:4, 689-708

Funk, P. 1996. Auctions with interdependent valuations. International Journal of Game Theory 25, 51-64

Kamien, M., 1992. Patent Licensing. In: Aumann, R., Sergiu, H. (Eds.), Handbook of Game Theory with Economic Applications, Vol. 1, North Holland

Kamien, M., Tauman Y., 1984. The private value of a patent: a game theoretic analysis. Journal of Economics (Suppl) 4, 93-118

Kamien, M., Tauman, Y., 1986. Fees versus royalties and the private value of a patent. Quarterly Journal of Economics 101:3, 471-492

Katz, M., Shapiro, C., 1986. How to license intangible property. Quarterly Journal of Economics 101:3, 567-589

Sen, D., Tauman, Y., 2007. General licensing schemes for a cost-reducing innovation. Games and Economic Behavior 59:1, 163-186

Shapiro, C., 1985. Patent licensing and R & D rivalry. American Economic Review 75:2, 25-30

Wang, X., 1998. Fee versus royalty licensing in a Cournot duopoly model. Economics Letters 60, 55-62