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

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  • Banerjee, Swapnendu
  • Poddar, Sougata

Abstract

We study various modes of technology transfer of an outside innovator in a spatial framework when the potential licensees are asymmetric. In addition to different licensing options, we also look into the option of selling the property rights of innovation and find the optimal mode of technology transfer. For licensing we find the optimal policy is to offer pure royalty contracts to both licensee firms when cost differentials between the firms are relatively small compared to the transportation cost, otherwise offer a fixed fee licensing contract to the efficient firm only. Interestingly, we show the innovator is always better-off selling the innovation to any one of the firms who further licenses it to the rival firm. The result holds irrespective of the size of the innovation (drastic or non-drastic) and the degree of cost asymmetry between the licensees. Social welfare is greater under selling than licensing.

Suggested Citation

  • Banerjee, Swapnendu & Poddar, Sougata, 2019. "‘To sell or not to sell’: Licensing versus selling by an outside innovator," Economic Modelling, Elsevier, vol. 76(C), pages 293-304.
    • Handle: RePEc:eee:ecmode:v:76:y:2019:i:c:p:293-304
    DOI: 10.1016/j.econmod.2018.08.006
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    Cited by:

    1. Jingpei Ma & Xuejun Sun, 2023. "Green technology licensing: Evaluating government subsidies based on different efficiency levels across competitors," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(4), pages 1920-1934, June.
    2. Lu, Yuanzhu & Poddar, Sougata, 2023. "Exclusive and non-exclusive licensing with shelving," Mathematical Social Sciences, Elsevier, vol. 126(C), pages 13-29.
    3. Sánchez, M. & Nerja, A., 2024. "The role of asymmetric innovation’s sizes in technology licensing under partial vertical integration," Research in Economics, Elsevier, vol. 78(2).
    4. Swapnendu Banerjee & Arijit Mukherjee & Sougata Poddar, 2023. "Optimal patent licensing—Two or three‐part tariff," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 25(3), pages 624-648, June.
    5. Sougata Poddar & Swapnendu Banerjee & Monalisa Ghosh, 2021. "Technology transfer in spatial competition when licensees are asymmetric," Manchester School, University of Manchester, vol. 89(1), pages 24-45, January.
    6. Jiyun Cao & Arijit Mukherjee, 2024. "Foreign Direct Investment and Technology Licensing in a Polluting Industry," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 87(9), pages 2361-2399, September.

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    More about this item

    Keywords

    Outside innovator; Cost-reducing innovation; Patent licensing; Patent selling; Welfare; Linear city model;
    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

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