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Choices and impacts of cross-licensing contracts

Dan Zhao

International Review of Economics & Finance, 2017, vol. 48, issue C, 389-405

Abstract: By relaxing the common assumption of a perfectly monopolized technology market, this article analyses strategic behaviors of incumbents upon technology licensing who hold cost-reducing/quality-improving technology, and examines some hot issues related to the implications on antitrust and welfare, the role of bargain in cross-licensing, the significance of both cost-reducing/quality-improving technology in competition. The findings show that: I) cross-licensing cannot necessarily enhance the degree of collusion, and further harms the consumer surplus and social welfare under quantity competition; II) when the rivals have the participated motivation to license, the outcomes of licensing games depend on the magnitude of innovation, the degree of differentiation on production cost and quality between the enterprises. With a small non-drastic innovation, only cost-reducing/quality-improving licensing occurs if there is a small/large cost difference and small quality difference. However, cross-licensing upon quality-cost does occur if small cost difference and large quality difference. Once with a major non-drastic or drastic innovation, only quality-improving licensing occurs regardless of production cost or product quality difference; III) in contrast that quality-improving technology could help increase the willing-to-pay by consumers with no drop on population, the enterprise that holds cost-reducing technology with drastic innovation could make zero production of the rival or expel it before/after licensing contract; IV) the cross-licensing parties with incomplete bargaining power happen to have the consistent aims to increase industry profit, which promotes the industry a virtuous cycle; V) government would rather support the post-outcome of cross-licensing than courage the ex-ante formation of R&D cooperation.

Keywords: Cost-reducing innovation; Quality-improving innovation; Quantity competition; Cross-licensing; Game theory; R&D policy (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1016/j.iref.2017.01.002

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