‘To sell or not to sell’: Licensing versus Selling by an outside innovator

Banerjee, Swapnendu and Poddar, Sougata (2017): ‘To sell or not to sell’: Licensing versus Selling by an outside innovator.

Abstract

Abstract Study of patent licensing in spatial competition is relatively sparse. We study optimal licensing policies of an outside innovator in spatial framework when the potential licensees are asymmetric. We also introduce the notion of selling the property rights of innovation. We then examine the incentive of the innovator who sell the rights and compare that with conventional licensing contracts. We address this problem in linear city with two competing asymmetric firms (potential licensees). We show the optimal licensing policy is pure royalty to both firms when cost differentials between the firms are relatively small, otherwise it is fixed fee licensing to the efficient firm only. Interestingly, we show the innovator is always better-off selling innovation to one of the firms. This holds irrespective of the size of the innovation (drastic or non-drastic) and the degree of pre-innovation cost asymmetry between the firms. Social welfare is greater under selling than licensing.

• Item Type: MPRA Paper
• Language: English
• Keywords: Outside innovator, Cost-reducing innovation, Patent Licensing, Patent Selling, Welfare, Linear city model
• 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; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets

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