The Price of Knowledge Diffusion: Technology Licensing and Market Power

Ville Korpela and Eero Mäkynen
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Ville Korpela: Turku School of Economics, University of Turku, Finland
Eero Mäkynen: Turku School of Economics, University of Turku, Finland

No 174, Discussion Papers from Aboa Centre for Economics

Abstract: Business dynamism has been slowing globally over the last several decades. In a recent study, Akcigit and Ates (2023) examine the relative importance of different channels behind this development and highlight weakened knowledge diffusion from the technology frontier to followers as a dominant force.1 Their study also suggests that diffusion may weaken endogenously as the technology gap widens and market power accumulates, raising the question of how innovation policy can strengthen diffusion without reducing welfare. In this paper we study leader-to-follower licensing as a policy-relevant diffusion margin, and evaluate licensing subsidies relative to direct R&D subsidies. We develop an endogenous-growth general equilibrium model in which firms compete in prices and invest in R&D; the technology leader endogenously chooses whether to license to the follower, trading off higher static profits against faster follower catch-up through knowledge diffusion. We calibrate the model to Finnish data from 2014–2019. Our first exercise evaluates whether allowing licensing is desirable by shutting down the licensing channel in the calibrated economy. In the Finnish benchmark, shutting down licensing lowers growth but increases consumption-equivalent welfare, because the level effects of reduced concentration dominate the diffusion benefits of licensing. We then vary the diffusion rate through licensing and product substitutability to characterize when licensing becomes welfare-improving. In that region, solving the policymaker’s problem shows a non-trivial interaction: higher R&D subsidies can reduce equilibrium licensing by moving leaders more quickly into the monopoly-pricing states where licensing is privately unattractive, so the optimal policy mix augments R&D support with a non-negligible licensing subsidy to sustain diffusion.

Keywords: Antitrust Policy; Business Dynamism; Endogenous Growth; Innovation Policy; Licensing; Technology Diffusion (search for similar items in EconPapers)
JEL-codes: E22 L10 L41 O33 O34 (search for similar items in EconPapers)
Pages: 46
Date: 2026-02
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