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Signaling in Technology Licensing with a Downstream Oligopoly

Author

Listed:
  • Cheng-Tai Wu

    (Fu Jen Catholic University)

  • Cheng-Hau Peng

    (Fu Jen Catholic University)

  • Tsung-Sheng Tsai

    (National Taiwan University)

Abstract

We analyze licensing contracts in an oligopolistic downstream market where an outside innovator has private information with regard to its technology. Under complete information, the innovator uses a fee-only or a two-part contract to extract the rent that is generated from its innovation, so that all of the downstream firms receive nothing but their reservation payoff. By contrast, under incomplete information with respect to the efficiency of innovation, there can be a conflict between signaling and rent extracting: A contract by the efficient innovator that extracts too much rent invites the inefficient innovator to mimic it. In this case, the efficient type may give up charging the fixed fee and offer a royalty-only contract, so as to discourage the mimicking. Moreover, when the downstream market is sufficiently competitive, the royalty-only contract will eventually win vis-a-vis the two-part contract because it is more effective for the efficient type to signal itself.

Suggested Citation

  • Cheng-Tai Wu & Cheng-Hau Peng & Tsung-Sheng Tsai, 2021. "Signaling in Technology Licensing with a Downstream Oligopoly," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 58(4), pages 531-559, June.
    • Handle: RePEc:kap:revind:v:58:y:2021:i:4:d:10.1007_s11151-020-09788-6
    DOI: 10.1007/s11151-020-09788-6
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    References listed on IDEAS

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    More about this item

    Keywords

    Signaling; Technology licensing; Downstream oligopoly;
    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
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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