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Licensing with Free Entry

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Abstract

We introduce a fairly general licensing model with an endogenous industry structure – in terms of number of active firms – and general licensing contracts. We show that when the patentee can employ contracts that can condition on market entry or price, it can implement an outcome that yields monopoly profits by awarding the license to a single firm. Furthermore, when the patentee can only use contracts based on the quantities of the licensees, it still captures the entire market via a single licensee, albeit not at the monopoly price. Commonly assumed two-part tariff contracts cannot duplicate this last outcome and yield lower profits. We discuss the welfare implications of various contractual schemes.

Suggested Citation

  • Johannes Muthers & Toker Doganoglu & Firat Inceoglu, 2018. "Licensing with Free Entry," Economics working papers 2018-12, Department of Economics, Johannes Kepler University Linz, Austria.
    • Handle: RePEc:jku:econwp:2018_12
    Note: English
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    References listed on IDEAS

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    1. San Martín, Marta & Saracho, Ana I., 2010. "Royalty licensing," Economics Letters, Elsevier, vol. 107(2), pages 284-287, May.
    2. Giebe, Thomas & Wolfstetter, Elmar, 2008. "License auctions with royalty contracts for (winners and) losers," Games and Economic Behavior, Elsevier, vol. 63(1), pages 91-106, May.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    7. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626, National Bureau of Economic Research, Inc.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Patent licensing; free entry; quantity competition.;
    All these keywords.

    JEL classification:

    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing
    • K11 - Law and Economics - - Basic Areas of Law - - - Property Law
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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