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Competition, Product Innovation and Licensing

Chang Ray-Yun, Hwang Hong and Cheng-Hau Peng ()
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Chang Ray-Yun: Department of Economics, Chinese Culture University, Taipei, Taiwan
Hwang Hong: Department of Economics, National Taiwan University, Taipei, Taiwan

The B.E. Journal of Economic Analysis & Policy, 2017, vol. 17, issue 1, 14

Abstract: This paper compares market profit and social welfare levels between differentiated Bertrand and Cournot duopoly. We start with a basic model in which a firm with a production technology can license its new technology to a potential rival who can use the technology to produce a differentiated product and compete with the incumbent firm. It is found that for any given technology level, Bertrand competition is necessarily more profitable but less socially desirable, due to its higher royalty rate. By contrast, if the licensee firm is an incumbent firm, the results hold if the technology level is high. Furthermore, if we assume the licensor firm can engage in product innovation and choose its optimal technology endogenously and the R&D efficiency is high (low), the welfare ranking is reversed (still holds).

Keywords: Bertrand versus Cournot competition; licensing; product R&D; welfare (search for similar items in EconPapers)
JEL-codes: D43 D45 L13 L24 (search for similar items in EconPapers)
Date: 2017
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