Optimal licensing contracts with a downstream oligopoly: insider versus outsider innovation

Tsung-Sheng Tsai () and Cheng-Tai Wu ()
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Cheng-Tai Wu: Fu Jen Catholic University

Economic Theory Bulletin, 2022, vol. 10, issue 1, No 11, 147-165

Abstract: Abstract In the literature that deals with cost-reduction technology licensing in an oligopolistic downstream market, the paper by Sen and Tauman (Games Econ Behav 59:163–186, 2007) has been a milestone in that it thoroughly characterizes the optimal licensing contracts for both cases of insider and outsider innovation under complete information. However, when determining the licensee’s fee payment to obtain the license through an auction, their treatments for different numbers of licensees are inconsistent. We instead use a consistent approach that can be applied to all numbers of licensees, in which a firm’s reservation payoff is determined by its Cournot profit if it rejects the contract. We find that the optimal contract is for both the insider and outsider innovator to sell the license to all downstream firms. We also show that an insider innovator sets a (weakly) higher royalty rate and generates a (weakly) lower social welfare than an outsider innovator.

Keywords: Technology licensing; Oligopoly; Insider innovator; Outsider innovator (search for similar items in EconPapers)
JEL-codes: D43 D45 L13 L24 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s40505-022-00224-4

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