Welfare reducing licensing |
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Authors: | Ramon Faulí -Oller,Joel Sandoní s, |
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Affiliation: | a Department de Fonaments de l'Anàlisi Econòmica, Universitat d'Alacant, Campus de Sant Vicent, 03071, Alacant, Spain;b Departamento de Fundamentos del Análisis Económico, Universidad del País Vasco, Avd. Lehendakari Aguirre 83, 48015, Bilbao, Spain |
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Abstract: | In this paper, we characterize situations where licensing a cost reducing innovation to a rival firm using two-part tariff contracts (a fixed fee plus a linear per unit of output royalty) reduces social welfare. We show that it occurs if (i) the firms compete in prices, (ii) the innovation is large enough but not drastic, and (iii) the goods are close enough substitutes. Moreover, we show that, regardless of the type of competition, first, the optimal contract always includes a positive royalty and, second, even drastic innovations are licensed whenever the goods are not homogeneous. |
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Keywords: | Two-part tariff contracts Patent licensing |
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