Working Paper: CEPR ID: DP2740
Authors: Ramon Fauloller; Joel Sandons
Abstract: The optimal competition policy when licensing is an alternative to a merger, which has the intention of transferring a superior technology, and is derived in a differentiated goods duopoly, as in the cases of Cournot and Bertrand competition. We show that whenever both royalties and fixed fees are feasible, mergers should not be allowed, which fits the prescription of the US Horizontal Merger Guidelines. In contrast, when only one instrument is feasible, be it fixed fees or royalties, the possibility of licensing cannot be used as a definitive argument against mergers.
Keywords: competition policy; merger; patent licensing
JEL Codes: D43; D45; L41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fixed fees and royalties feasible instruments for licensing superior technology (L24) | licensing contracts are welfare superior to mergers (D45) |
| mergers reduce competition significantly (L41) | licensing can maintain a level of competition while facilitating technology transfer (D45) |
| only fixed fees available (G29) | licensing becomes unprofitable for the patentee (D45) |
| only royalties feasible (G19) | patentee sets a royalty that distorts licensee's output (D45) |
| licensing would lead to worse welfare outcomes (D45) | mergers should be allowed under certain conditions (L41) |