How to license a downstream technology when upstream firms are capacity constrained?

Eva-Marie Scholz ()
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Eva-Marie Scholz: Université catholique de Louvain, CORE, Belgium

No 2017004, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: In this paper, we study the relationship between capacity constraints and licensing strategies. To doso, we focus on the licensing strategy of an outside innovator who licenses a process innovation to the downstream sector of a vertical Cournot oligopoly. Downstream firms soruce an essential production factor from a capacity constrained upstream sector. In this setting, we show that the innovator optimally licenses large innovations via per-unit royalty contracts and small innovations via fixed fee contracts. Moreover, an increase in the strength of the capacity constraints makes it more likely that hte optimal licensing contract includes a strictly positive per-unit royalty rate. As a final point, we discuss the relationship between capacity constraints and the social optimality of the innovator’s licensing strategy as measured by aggregate welfaore or the diffusion of the innovation on the downstream market

Keywords: capacity constraints; licensing contracts, vertical Cournot oligopoly (search for similar items in EconPapers)
JEL-codes: D43 L13 O31 O34 (search for similar items in EconPapers)
Date: 2017-02-27
New Economics Papers: this item is included in nep-com, nep-cta, nep-ino and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:cor:louvco:2017004

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