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Negative Royalty in Duopoly and Definition of License Fee: General Demand and Cost Functions

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  • Masahiko Hattori

    (Faculty of Economics, Doshisha University, Japan)

  • Yasuhito Tanaka

    (Faculty of Economics, Doshisha University, Japan)

Abstract

We extend the analysis about negative royalty in a duopoly with an outside innovator under linear demand and cost functions by Liao and Sen (2005) to a situation with general demand and cost functions. Moreover, we consider a case where an innovator has an option to enter the market and show that the optimal royalty rate for the innovator when it does not have an option to enter the market is smaller than that when it can enter the market. The sign of the optimal royalty rate depends on whether firms' goods are strategic substitutes or strategic complements. We provide a concise example of welfare analysis, which suggests that the prohibition of entry of the innovator into the market may be an appropriate policy.

Suggested Citation

  • Masahiko Hattori & Yasuhito Tanaka, 2018. "Negative Royalty in Duopoly and Definition of License Fee: General Demand and Cost Functions," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 17(2), pages 163-178, September.
    • Handle: RePEc:ijb:journl:v:17:y:2018:i:2:p:163-178
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    References listed on IDEAS

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    1. Sen, Debapriya & Tauman, Yair, 2007. "General licensing schemes for a cost-reducing innovation," Games and Economic Behavior, Elsevier, vol. 59(1), pages 163-186, April.
    2. Morton I. Kamien & Yair Tauman, 1986. "Fees Versus Royalties and the Private Value of a Patent," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(3), pages 471-491.
    3. Seade, Jesus, 1980. "The stability of cournot revisited," Journal of Economic Theory, Elsevier, vol. 23(1), pages 15-27, August.
    4. Sen, Debapriya & Stamatopoulos, Giorgos, 2016. "Licensing under general demand and cost functions," European Journal of Operational Research, Elsevier, vol. 253(3), pages 673-680.
    5. Andrea Fosfuri & Esther Roca, 2004. "Optimal Licensing Strategy: Royalty or Fixed Fee?," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 3(1), pages 13-19, April.
    6. Sen, Debapriya, 2005. "Fee versus royalty reconsidered," Games and Economic Behavior, Elsevier, vol. 53(1), pages 141-147, October.
    7. Wang, X. Henry, 1998. "Fee versus royalty licensing in a Cournot duopoly model," Economics Letters, Elsevier, vol. 60(1), pages 55-62, July.
    8. Chun‐Hsiung Liao & Debapriya Sen, 2005. "Subsidy In Licensing: Optimality And Welfare Implications," Manchester School, University of Manchester, vol. 73(3), pages 281-299, June.
    9. Dixit, Avinash K, 1986. "Comparative Statics for Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 107-122, February.
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    Cited by:

    1. Salman Ali & Syed Mizanur Rahman, 2020. "R&D Expenditure in a Competitive Landscape: A Game Theoretic Approach," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 19(1), pages 47-60, June.

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    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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