Optimal transfer of a quality-enhancing innovation in a vertical related market

Manel Antelo and Lluís Bru

MPRA Paper from University Library of Munich, Germany

Abstract: This paper examines the commercialization of an external, quality-enhancing (product) innovation within a vertically related market, comparing outright sale and licensing. Licensing may involve a royalty of per-unit or ad valorem type and potential adopters are two downstream firms that source a core input from a single upstream supplier. The analysis reveals that the patentholder’s incentive to license the innovation, particularly through per-unit royalties, outweighs that of an outright sale. This form of technology transfer, however, is shown to potentially reduce consumer and social welfare compared to the pre-innovation state, thus providing a rationale for public policy interventions aimed at restricting royalty-based technology transfer.

Keywords: Vertical industry; quality-enhancing product innovation; sale versus licensing; two-part tariff contracts; per-unit royalty; ad-valorem royalty; welfare (search for similar items in EconPapers)
JEL-codes: L13 O32 (search for similar items in EconPapers)
Date: 2025-09, Revised 2025-09
New Economics Papers: this item is included in nep-com, nep-cse, nep-ino, nep-ipr, nep-mac and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:126850

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