Cost asymmetry and vertical product licensing

Ray-Yun Chang and Cheng-Hau Peng ()

Asia-Pacific Journal of Accounting & Economics, 2013, vol. 20, issue 3, 270-280

Abstract: This paper investigates the optimal licensing contract for a product innovation in a vertically differentiated duopoly. The two firms have different marginal costs and the high-quality firm can license its technology on product quality to the low-quality firm. It is found that the optimal form of licensing contract depends on the relative marginal costs of the two firms. If the marginal cost of the high-quality firm is relatively high (low), fixed-fee licensing is superior (inferior) to royalty licensing from the viewpoint of the licensor. Surprisingly, consumers are worse off if the quality difference between the two firms is small. This result is in contrast to the received wisdom in the product licensing literature.

Date: 2013
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Citations: View citations in EconPapers (4)

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DOI: 10.1080/16081625.2013.782809

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Asia-Pacific Journal of Accounting & Economics is currently edited by Yin-Wong Cheung, Hong Hwang, Jeong-Bon Kim, Shu-Hsing Li and Suresh Radhakrishnan

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