IDEAS home Printed from https://ideas.repec.org/a/spr/etbull/v10y2022i1d10.1007_s40505-022-00224-4.html
   My bibliography  Save this article

Optimal licensing contracts with a downstream oligopoly: insider versus outsider innovation

Author

Listed:
  • Tsung-Sheng Tsai

    (National Taiwan University)

  • Cheng-Tai Wu

    (Fu Jen Catholic University)

Abstract

In the literature that deals with cost-reduction technology licensing in an oligopolistic downstream market, the paper by Sen and Tauman (Games Econ Behav 59:163–186, 2007) has been a milestone in that it thoroughly characterizes the optimal licensing contracts for both cases of insider and outsider innovation under complete information. However, when determining the licensee’s fee payment to obtain the license through an auction, their treatments for different numbers of licensees are inconsistent. We instead use a consistent approach that can be applied to all numbers of licensees, in which a firm’s reservation payoff is determined by its Cournot profit if it rejects the contract. We find that the optimal contract is for both the insider and outsider innovator to sell the license to all downstream firms. We also show that an insider innovator sets a (weakly) higher royalty rate and generates a (weakly) lower social welfare than an outsider innovator.

Suggested Citation

  • Tsung-Sheng Tsai & Cheng-Tai Wu, 2022. "Optimal licensing contracts with a downstream oligopoly: insider versus outsider innovation," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 10(1), pages 147-165, May.
  • Handle: RePEc:spr:etbull:v:10:y:2022:i:1:d:10.1007_s40505-022-00224-4
    DOI: 10.1007/s40505-022-00224-4
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s40505-022-00224-4
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.

    File URL: https://libkey.io/10.1007/s40505-022-00224-4?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. X. H. Wang & Bill Z. Yang, 1999. "On Licensing Under Bertrand Competition," Australian Economic Papers, Wiley Blackwell, vol. 38(2), pages 106-119, June.
    2. 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.
    3. Stefano Colombo & Siyu Ma & Debapriya Sen & Yair Tauman, 2021. "Equivalence between fixed fee and ad valorem profit royalty," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 23(5), pages 1052-1073, October.
    4. 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.
    5. Amir, Rabah & Encaoua, David & Lefouili, Yassine, 2014. "Optimal licensing of uncertain patents in the shadow of litigation," Games and Economic Behavior, Elsevier, vol. 88(C), pages 320-338.
    6. Can Erutku & Yves Richelle, 2007. "Optimal Licensing Contracts and the Value of a Patent," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(2), pages 407-436, June.
    7. Michael L. Katz & Carl Shapiro, 1985. "On the Licensing of Innovations," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 504-520, Winter.
    8. repec:bla:ausecp:v:38:y:1999:i:2:p:106-19 is not listed on IDEAS
    9. Michael L. Katz & Carl Shapiro, 1986. "How to License Intangible Property," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(3), pages 567-589.
    10. Wang, X. Henry, 1998. "Fee versus royalty licensing in a Cournot duopoly model," Economics Letters, Elsevier, vol. 60(1), pages 55-62, July.
    11. Morton I. Kamien & Yair Tauman, 2002. "Patent Licensing: The Inside Story," Manchester School, University of Manchester, vol. 70(1), pages 7-15, January.
    12. Shapiro, Carl, 1985. "Patent Licensing and R&D Rivalry," American Economic Review, American Economic Association, vol. 75(2), pages 25-30, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sen, Debapriya & Tauman, Yair, 2018. "Patent licensing in a Cournot oligopoly: General results," Mathematical Social Sciences, Elsevier, vol. 96(C), pages 37-48.
    2. Amir, Rabah & Encaoua, David & Lefouili, Yassine, 2014. "Optimal licensing of uncertain patents in the shadow of litigation," Games and Economic Behavior, Elsevier, vol. 88(C), pages 320-338.
    3. Debapriya Sen & Giorgos Stamatopoulos, 2009. "Technology Transfer Under Returns To Scale," Manchester School, University of Manchester, vol. 77(3), pages 337-365, June.
    4. Sen, Debapriya, 2005. "Fee versus royalty reconsidered," Games and Economic Behavior, Elsevier, vol. 53(1), pages 141-147, October.
    5. Toshihiro Matsumura & Noriaki Matsushima, 2010. "Patent licensing, bargaining, and product positioning," ISER Discussion Paper 0775, Institute of Social and Economic Research, Osaka University.
    6. 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.
    7. Miao, Chun-Hui, 2016. "Licensing a technology standard," International Journal of Industrial Organization, Elsevier, vol. 47(C), pages 33-61.
    8. Sen, Debapriya, 2005. "On the coexistence of different licensing schemes," International Review of Economics & Finance, Elsevier, vol. 14(4), pages 393-413.
    9. Ismail Saglam, 2023. "Licensing cost‐reducing innovations under supply function competition," Bulletin of Economic Research, Wiley Blackwell, vol. 75(1), pages 180-201, January.
    10. Nisvan Erkal, 2005. "Optimal Licensing Policy in Differentiated Industries," The Economic Record, The Economic Society of Australia, vol. 81(252), pages 51-60, March.
    11. Sudipto Bhattacharya & Claude d’Aspremont & Sergei Guriev & Debapriya Sen & Yair Tauman, 2014. "Cooperation in R&D: Patenting, Licensing, and Contracting," International Series in Operations Research & Management Science, in: Kalyan Chatterjee & William Samuelson (ed.), Game Theory and Business Applications, edition 2, chapter 0, pages 265-286, Springer.
    12. Kim, Seung-Leul & Lee, Sang-Ho, 2021. "Optimal tariffs with emissions taxes under non-restrictive two-part licensing strategies by a foreign eco-competitor," MPRA Paper 108496, University Library of Munich, Germany.
    13. repec:ebl:ecbull:v:4:y:2008:i:17:p:1-11 is not listed on IDEAS
    14. Cuihong Fan & Byoung Heon Jun & Elmar G. Wolfstetter, 2018. "Optimal licensing under incomplete information: the case of the inside patent holder," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 66(4), pages 979-1005, December.
    15. Giorgos Stamatopoulos, 2008. "On the possibility of licensing in a market with logit demand functions," Economics Bulletin, AccessEcon, vol. 4(17), pages 1-11.
    16. Rabah Amir & David Encaoua & Yassine Lefouili, 2011. "Per-Unit Royalty vs Fixed Fee: The Case of Weak Patents," Working Papers halshs-00595493, HAL.
    17. Chen, Jingxian & Liang, Liang & Yao, Dong-qing, 2017. "An analysis of intellectual property licensing strategy under duopoly competition: Component or product-based?," International Journal of Production Economics, Elsevier, vol. 193(C), pages 502-513.
    18. Toshihiro Matsumura & Noriaki Matsushima & Giorgos Stamatopoulos, 2010. "Location equilibrium with asymmetric firms: the role of licensing," Journal of Economics, Springer, vol. 99(3), pages 267-276, April.
    19. Bagchi, Aniruddha & Mukherjee, Arijit, 2014. "Technology licensing in a differentiated oligopoly," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 455-465.
    20. Stefano Colombo & Luigi Filippini, 2016. "Revenue royalties," Journal of Economics, Springer, vol. 118(1), pages 47-76, May.
    21. Haiyang Xia & Tijun Fan & Xiangyun Chang, 2019. "Emission Reduction Technology Licensing and Diffusion Under Command-and-Control Regulation," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 72(2), pages 477-500, February.

    More about this item

    Keywords

    Technology licensing; Oligopoly; Insider innovator; Outsider innovator;
    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:etbull:v:10:y:2022:i:1:d:10.1007_s40505-022-00224-4. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.