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Welfare reducing licensing

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  • Fauli-Oller, Ramon
  • Sandonis, Joel

Abstract

In this paper, we characterize situations where licensing an innovation to a rival firm using two-part tariff contracts (a fixed fee plus a linear per unit of output royalty) reduces social welfare. We show that it occurs if and only if i) the goods are close enough substitutes, ii) the innovation is large enough but not drastic and iii) the firms compete in prices. Moreover, we show that, regardless of the type of competition, first, the optimal contract always includes a positive royalty and, second, even drastic innovations are licensed whenever the goods are not homogeneous.
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Suggested Citation

  • Fauli-Oller, Ramon & Sandonis, Joel, 2002. "Welfare reducing licensing," Games and Economic Behavior, Elsevier, vol. 41(2), pages 192-205, November.
    • Handle: RePEc:eee:gamebe:v:41:y:2002:i:2:p:192-205
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing

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