Decreasing returns, patent licensing and price-reducing taxes

Sen, Debapriya and Stamatopoulos, Giorgos (2013): Decreasing returns, patent licensing and price-reducing taxes.

Abstract

Patent licensing agreements among competing firms usually involve royalties which are often considered to be anticompetitive as they raise market prices. In this paper we propose simple tax policies than can alleviate the effect of royalties. Considering a Cournot duopoly where firms produce under decreasing returns and trade a patented technology, we show that the interaction of royalties with decreasing returns may generate the counter-intuitive result that market prices decrease in the magnitude of diseconomies of scale. In such cases there exist progressive quantity taxes on firms that weaken the effect of royalties and lower the market prices. These taxes collect sufficient revenue to compensate firms for their losses. As a result, it is possible to design deficit neutral tax-transfer schemes that strictly Pareto improve the welfare of consumers as well as firms.

• Item Type: MPRA Paper
• Language: English
• Keywords: Decreasing returns; patent licensing; royalty; progressive quantity tax; deficit neutrality
• Subjects: D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D45 - Rationing ; Licensing; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency ; Optimal Taxation; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L24 - Contracting Out ; Joint Ventures ; Technology Licensing

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