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Decreasing returns, patent licensing and price-reducing taxes

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  • Sen, Debapriya
  • Stamatopoulos, Giorgos

Abstract

Patent licensing agreements among competing firms usually involve royalties which are often considered to be anticompetitive as they raise market prices. In this paper we propose simple tax policies than can alleviate the effect of royalties. Considering a Cournot duopoly where firms produce under decreasing returns and trade a patented technology, we show that the interaction of royalties with decreasing returns may generate the counter-intuitive result that market prices decrease in the magnitude of diseconomies of scale. In such cases there exist progressive quantity taxes on firms that weaken the effect of royalties and lower the market prices. These taxes collect sufficient revenue to compensate firms for their losses. As a result, it is possible to design deficit neutral tax-transfer schemes that strictly Pareto improve the welfare of consumers as well as firms.

Suggested Citation

  • Sen, Debapriya & Stamatopoulos, Giorgos, 2013. "Decreasing returns, patent licensing and price-reducing taxes," MPRA Paper 46246, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:46246
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Stefano Colombo & Luigi Filippini & Debapriya Sen, 2023. "Patent Licensing and Capacity in a Cournot Model," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 62(1), pages 45-62, February.
    2. Colombo, Stefano & Filippini, Luigi & Sen, Debapriya, 2020. "Licensing with capacity constraint," MPRA Paper 102653, University Library of Munich, Germany.
    3. Siyu Ma & Debapriya Sen & Yair Tauman, 2024. "Optimal patent licensing: from three to two part tariffs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 78(4), pages 1233-1273, December.
    4. Stefano Colombo & Luigi Filippini, 2016. "Revenue royalties," Journal of Economics, Springer, vol. 118(1), pages 47-76, May.
    5. Ramon Fauli‐Oller & Joel Sandonís, 2022. "Fee versus royalty licensing in a Cournot duopoly with increasing marginal costs," Manchester School, University of Manchester, vol. 90(4), pages 439-452, July.

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    More about this item

    Keywords

    Decreasing returns; patent licensing; royalty; progressive quantity tax; deficit neutrality;
    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
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures

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