Static inefficiency of compulsory licensing: Quantity vs. price competition

Franco Cugno () and Elisabetta Ottoz

POLIS Working Papers from Institute of Public Policy and Public Choice - POLIS

Abstract: A common argument against compulsory licensing of intellectual property maintains that it facilitates the entry of inefficient producers, which may reduce social welfare independently of any effects on R and D incentives. We study the issue in a model where the innovative firm, under the threat of compulsory licensing, react strategically by choosing between quantity and price competition. We show that the risk of a reduction in static welfare due to the entry of highly inefficient firms is avoided if licensing entails a royalty per unit of output and zero fixed fee. The rationale behind this result lies in the fact that compulsory licensing threat works as a disciplining device to improve static social welfare, even when the applicant is a high cost inefficient firm.

Keywords: compulsory licensing; essential facilities; entry; welfare (search for similar items in EconPapers)
JEL-codes: K00 L49 O34 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2006-11
New Economics Papers: this item is included in nep-com, nep-ipr, nep-pr~ and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:uca:ucapdv:73

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