Decreasing returns, patent licensing and price-reducing taxes

Sen, Debapriya and Stamatopoulos, Giorgos (2013): Decreasing returns, patent licensing and price-reducing taxes. Forthcoming in: Journal of Institutional and Theoretical Economics

Abstract

This paper proposes simple tax policies that can alleviate the distortive effects of royalties. We consider a Cournot duopoly under decreasing returns where one of the firms has a patented technology that it can license to its rival using combinations of royalties and fixed fees. Under optimal licensing policies for the patentee, stronger diseconomies of scale result in lower market prices. It is possible to construct tax-transfer schemes for the firms that are Pareto improving as well as deficit neutral, i.e., these taxes lower market prices and collect sufficient revenue to compensate firms for their losses from taxation without incurring any deficit.

• Item Type: MPRA Paper
• Language: English
• Keywords: Decreasing returns; royalty; quantity tax; deficit neutrality
• Subjects: D - Microeconomics > D2 - Production and Organizations > D21 - Firm Behavior: Theory; 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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