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Competition, Product Innovation and Licensing

Author

Listed:
  • Chang Ray-Yun

    (Department of Economics, Chinese Culture University, Taipei, Taiwan)

  • Hwang Hong

    (Department of Economics, National Taiwan University, Taipei, Taiwan)

  • Peng Cheng-Hau

    (Department of Economics, Fu Jen Catholic University, Taipei, Taiwan)

Abstract

This paper compares market profit and social welfare levels between differentiated Bertrand and Cournot duopoly. We start with a basic model in which a firm with a production technology can license its new technology to a potential rival who can use the technology to produce a differentiated product and compete with the incumbent firm. It is found that for any given technology level, Bertrand competition is necessarily more profitable but less socially desirable, due to its higher royalty rate. By contrast, if the licensee firm is an incumbent firm, the results hold if the technology level is high. Furthermore, if we assume the licensor firm can engage in product innovation and choose its optimal technology endogenously and the R&D efficiency is high (low), the welfare ranking is reversed (still holds).

Suggested Citation

  • Chang Ray-Yun & Hwang Hong & Peng Cheng-Hau, 2017. "Competition, Product Innovation and Licensing," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 17(1), pages 1-14, January.
    • Handle: RePEc:bpj:bejeap:v:17:y:2017:i:1:p:14:n:2
    DOI: 10.1515/bejeap-2016-0136
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    More about this item

    Keywords

    Bertrand versus Cournot competition; licensing; product R&D; welfare;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures

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