Endogenous licensing in cumulative innovation

Zonglai Kou () and Jian Zhang
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Zonglai Kou: China Center for Economic Studies, School of Economics, Fudan University, Shanghai 200433, China
Jian Zhang: School of Economics, Fudan University, Shanghai 200433, China

Frontiers of Economics in China-Selected Publications from Chinese Universities, 2007, vol. 2, issue 3, 424-457

Abstract: This paper analyzes the endogeneity of licensing arrangements in cost-reducing cumulative innovation. There exists the following results. First, for the first-generation patentee, ex post licensing matters for rent extraction while ex ante licensing matters for efficiency. Second, if the second-generation innovator does not exit, then the firms' profits as well as social welfare are all irrelevant to whether ex ante licensing is allowed. Third, costly litigation can occur on the equilibrium path and its occurrence is also irrelevant to ex ante licensing. Interestingly, the conditional probability of the first-generation patentee winning litigation first decreases and then increases in patent breadth. Fourth, optimal patent breadth depends on the tradeoff between litigation costs and antitrust effect.

Keywords: cumulative innovation; patent breadth; ex post licensing; ex ante licensing; perfect bayesian equilibrium (search for similar items in EconPapers)
JEL-codes: D23 K41 O34 (search for similar items in EconPapers)
Date: 2007
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