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Licensing a product innovation in a duopoly

Author

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  • Manel Antelo
  • Lluís Bru

Abstract

This paper studies the licensing of a product innovation in a duopoly by means of two-part tariff contracts composed of fixed-fee payments combined with per-unit or ad-valorem royalties. When the licensor is a firm within the industry (internal licensor), it licenses the innovation to its competitor by using a pure ad-valorem royalty, and welfare is reduced because the royalty has anticompetitive effects on market performance. On welfare grounds, fixed-fee predominates over per-unit royalty licensing, but has the disadvantage that firms sometimes fail to reach an agreement. A simple regulatory rule is then proposed for a second-best optimal policy on product innovation licensing. However, when the innovator is outside the industry (external licensor), it never uses ad-valorem royalties. Also evaluated is the value of the innovation for an internal and an external innovator, and licensing by both innovators under Bertrand competition.

Suggested Citation

  • Manel Antelo & Lluís Bru, 2024. "Licensing a product innovation in a duopoly," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 33(4), pages 533-549, May.
    • Handle: RePEc:taf:ecinnt:v:33:y:2024:i:4:p:533-549
    DOI: 10.1080/10438599.2023.2226090
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