Licensing of a quality-improving innovation

We study the licensing of a quality-improving innovation in a duopoly model with heterogeneous consumers. Firms compete in prices facing a logit demand framework. The innovator is an outsider to the market and sells licenses via up front fee (determined in an auction), royalty or their combination....

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Bibliographic Details
Published in:Mathematical social sciences 2008-11, Vol.56 (3), p.410-438
Main Authors: Stamatopoulos, Giorgos, Tauman, Yair
Format: Article
Language:English
Subjects:
Consumers
Covered market
Duopoly
Innovation
Licences
Licensing
Logit
Market structure
Quality standards
Quality-improving innovation
Quality-improving innovation Random utility Logit Licensing Covered market Uncovered market
Random utility
Social welfare
Uncovered market
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Summary:We study the licensing of a quality-improving innovation in a duopoly model with heterogeneous consumers. Firms compete in prices facing a logit demand framework. The innovator is an outsider to the market and sells licenses via up front fee (determined in an auction), royalty or their combination. We show that if the market is covered then irrespective of the magnitude of the innovation both firms acquire the new technology and pay positive royalty and zero up-front fee. The increase in social welfare due to the innovation is totally extracted by the innovator. For the uncovered market case we show that if the consumer heterogeneity is sufficiently high, then both firms become licensees. The licensees pay positive royalty and zero up-front fee–if the value of an outside alternative option is low–and both positive royalty and positive up-front fee — if the value of the outside alternative option is high.
ISSN:0165-4896
1879-3118
DOI:10.1016/j.mathsocsci.2008.06.006