Licensing a quality-enhancing innovation to an upstream firm

Xiaoli Tian

Economic Modelling, 2016, vol. 53, issue C, 509-514

Abstract: This paper examines the case where a patent holder who is not a producer licenses its quality-enhancing innovation to an upstream firm, which sells its product through a downstream monopoly. It is found that the patent holder prefers a two-part tariff contract, which includes both a fixed-fee and per-unit output royalty. However, the royalty included in the licensing contract makes each firm price at a markup over marginal cost and therefore makes both consumers and the society worse off, if the innovation is small and the supplier is weak. From a welfare perspective, licensing by means of an ad valorem tax is more efficient, as it allows the upstream firm to be less aggressive when trading with the downstream firm.

Keywords: Quality-enhancing (or vertical product) innovation; Outside patent holder; Fixed-fee (or per-unit royalty or ad valorem royalty, or two-part tariff) licensing; Bargaining power; Welfare (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:53:y:2016:i:c:p:509-514

DOI: 10.1016/j.econmod.2015.11.001

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