Exclusive Licensing in a Sequence of Innovations

In this paper, I examine the issues involved with sequential licensing of innovations. In particular, a model is developed in which the granting of an exclusive license has the potential to distort future industrial structure. Subsequent licensing negotiations are then affected by the initial exclusivity, giving the initial licensee more leverage in bidding. This dynamic effect gives firms strategic incentives to take exclusive licenses, even when, in a one-shot market, such licenses would not be optimal. Appropriate antitrust rules in the context of sequential innovations are then discussed.