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Quality differentiation and product innovation licensing

Yuxiang Zou and Tai-Liang Chen

Economic Modelling, 2020, vol. 87, issue C, 372-382

Abstract: Evidence reveals that there are more than 50% product innovation licensings applied within industries. We study product innovation licensing (quality-enhancing licensing) in both exclusive and non-exclusive schemes each under unit/revenue royalty and fixed fee in a vertically differentiated Cournot oligopoly, where a quality-leading firm is an internal licensor. We show that, under a non-exclusive licensing, royalty licensing is the superior policy for the licensor if quality difference within firms is small, regardless of whether a unit or revenue royalty scheme is offered. Under an exclusive licensing, a two-part tariff is optimal. If fixed fee licensing is practicable, the licensor favors an exclusive licensing. Furthermore, an increase in quality difference within firms increases the optimal rates. Using the simulated results, we examine that licensing improves social welfare in all schemes, and the number of licensees will influence the magnitude of welfare enhancement.

Keywords: Quality differentiation; Product innovation; Internal licensor; Exclusive/nonexclusive licensing; Unit/revenue royalty (search for similar items in EconPapers)
JEL-codes: D21 D43 D45 L13 L24 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.econmod.2019.08.010

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