Working Paper: CEPR ID: DP2284
Authors: Andrea Fosfuri; Ashish Arora
Abstract: In technology-based industries, incumbent firms often license their technology to other firms that will potentially compete with them. Such a strategy is difficult to explain within traditional models of licensing. This paper extends the literature on licensing by relaxing the assumption of a monopolist technology holder. We develop a model with many technological trajectories for the production of a differentiated good. We find that competition in the market for technology induces licensing of innovations, and that the number of licenses can be inefficiently large. A strong testable implication of our theory is that the number of licenses per patent holder decreases with the degree of product differentiation.
Keywords: licensing; market structure; oligopoly theory
JEL Codes: D23; D43; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Competition in the product market (L11) | Licensing of innovations (O34) |
| Licensing of innovations (O34) | Negative pecuniary externality for competitors (D62) |
| Licensing of innovations (O34) | Increased rents from licensing (D45) |
| Increased competition (L13) | Losses from increased competition (rent dissipation effect) (D43) |
| Lower transaction costs (D23) | Increased licensing activity (D45) |
| Greater bargaining power of the licensor (D45) | Increased licensing activity (D45) |
| Multiple technology holders (O39) | Excessive licensing (D45) |
| High competition (L13) | Too much licensing compared to socially efficient level (D45) |