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Vertical differentiation in oligopoly and license fees when outside innovator can enter the market: Two-step auction

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  • Hattori, Masahiko
  • Tanaka, Yasuhito

Abstract

When an outside innovating firm has a technology to produce a higher quality good than the good produced at present, it can sell licenses of its technology to incumbent firms, or enter the market and at the same time sell licenses, or enter the market without license. We examine the definitions of license fee in such a situation in an oligopoly with three firms under vertical product differentiation, one outside innovating firm and two incumbent firms, considering threat by entry of the innovating firm using a two-step auction. Also we show that in the case of uniform distribution of consumers' taste parameter and zero cost when the quality improvement (the difference between the quality of the high-quality good and the quality of the low-quality good) is small (or large), the two-step auction is (or is not) credible.

Suggested Citation

  • Hattori, Masahiko & Tanaka, Yasuhito, 2017. "Vertical differentiation in oligopoly and license fees when outside innovator can enter the market: Two-step auction," MPRA Paper 78987, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:78987
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    References listed on IDEAS

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    More about this item

    Keywords

    license; entry; oligopoly; vertical differentiation; two-step auction;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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