Innovation Diffusion and Strategic Outside Option in a Bargaining Game

Cecilia Vergari () and Luigi Filippini
Additional contact information
Cecilia Vergari: University of Pisa

Review of Industrial Organization, 2023, vol. 63, issue 1, No 3, 71 pages

Abstract: Abstract We develop an optimal licensing model of a product innovation in which the (external) patent holder negotiates sequentially a two-part tariff contract with two potential licensees that have a positive and strategic outside option. We study the role of this strategic outside option in determining technology diffusion and efficiency of the bargaining. Although rich enough contracts allow the solution of the well known opportunism problem, the strategic outside option of the second negotiator implies deviation from industry profit maximization, which reduces the profitability of nonexclusive licensing. As a result, exclusive licensing still prevails under certain conditions. We extend our analysis to assess the profitability for the innovator to integrate vertically with either firm in the market. The internal patent holder always sells the innovation to the rival non-affiliate as a way to co-opt the latter and improve the profits of the former. As a result, vertical integration as compared with vertical separation may imply a positive quality improving effect. The private and social profitability of vertical integration depends on the type of bargaining between the negotiators and on the distribution of their bargaining power.

Keywords: Patent licensing; Vertical differentiation; Vertical integration; Sequential bargaining (search for similar items in EconPapers)
JEL-codes: L13 L15 L24 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11151-023-09907-z Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:revind:v:63:y:2023:i:1:d:10.1007_s11151-023-09907-z

Ordering information: This journal article can be ordered from
http://www.springer. ... on/journal/11151/PS2

DOI: 10.1007/s11151-023-09907-z

Access Statistics for this article

Review of Industrial Organization is currently edited by L.J. White

More articles in Review of Industrial Organization from Springer, The Industrial Organization Society Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().