License and Entry Strategies for an Outside Innovator Under Duopoly

Masahiko Hattori () and Yasuhito Tanaka

Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, 2018, vol. 4, issue 1, No 5, 135-152

Abstract: Abstract In Proposition 4 of Kamien and Tauman (Q J Econ 101:471–492, 1986), assuming linear demand and cost functions with fixed fee licensing it was argued that for the outside innovating firm under oligopoly when the number of firms is small (or very large), strategy to enter the market with license of its cost-reducing technology to the incumbent firm (entry with license strategy) is more profitable than strategy to license its technology to the incumbent firm without entering the market (license without entry strategy). However, their result depends on their definition of license fee, and it is inappropriate if the innovating firm can enter the market. If we adopt an alternative more appropriate definition based on the threat by entry of the innovating firm, license without entry strategy is more profitable in the case of linear demand and cost functions. Also we investigate the problem in the case of quadratic cost functions in which entry with license strategy may be optimal. Further we will show that the optimal strategies for the innovating firm when license fees are determined under the assumption that the licensor takes all benefit of new technology and its optimal strategies when license fees are determined according to Nash bargaining solution are the same.

Keywords: Entry; License; Duopoly; Cost-reducing innovation; Innovating firm; Incumbent firm (search for similar items in EconPapers)
JEL-codes: D43 L13 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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DOI: 10.1007/s40797-017-0048-0

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