Static Efficiency of Compulsory Licensing: The Role of Limit Pricing

Franco Cugno and Elisabetta Ottoz

Journal of Interdisciplinary Economics, 2007, vol. 19, issue 1, 19-33

Abstract: A common argument against compulsory licensing of intellectual property maintains that it facilitates the entry of inefficient producers, which may reduce social welfare independently of any effects on R&D incentives. We study the issue in a model where the innovative firm, under the threat of compulsory licensing, reacts strategically by choosing between quantity and price competition. We show that the risk of a reduction in static welfare due to the entry of highly inefficient firms is avoided if licensing entails a royalty per unit of output and no fixed fees. The rationale behind this result lies in the fact that compulsory licensing threat works as a disciplining device to improve static social welfare, even when the applicant is a high cost inefficient firm. JEL codes: KOO, L49, 034.

Keywords: compulsory licensing; essential facilities; entry; welfare (search for similar items in EconPapers)
Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:sae:jinter:v:19:y:2007:i:1:p:19-33

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