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License and entry strategies for outside innovator in duopoly

Author

Listed:
  • Hattori, Masahiko
  • Tanaka, Yasuhito
Abstract
In Proposition 4 of Kamien and Tauman(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.

Suggested Citation

  • Hattori, Masahiko & Tanaka, Yasuhito, 2017. "License and entry strategies for outside innovator in duopoly," MPRA Paper 76444, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:76444
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    File URL: https://mpra.ub.uni-muenchen.de/76444/1/MPRA_paper_76444.pdf
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    References listed on IDEAS

    as
    1. Masahiko Hattori & Yasuhito Tanaka, 2014. "Incentive for adoption of new technology in duopoly under absolute and relative profit maximization," Economics Bulletin, AccessEcon, vol. 34(3), pages 2051-2059.
    2. Michael L. Katz & Carl Shapiro, 1985. "On the Licensing of Innovations," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 504-520, Winter.
    3. Masahiko Hattori & Yasuhito Tanaka, 2016. "Subsidizing New Technology Adoption in a Stackelberg Duopoly: Cases of Substitutes and Complements," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 2(2), pages 197-215, July.
    4. Naoki Watanabe & Shigeo Muto, 2008. "Stable profit sharing in a patent licensing game: general bargaining outcomes," International Journal of Game Theory, Springer;Game Theory Society, vol. 37(4), pages 505-523, December.
    5. Anne Duchêne & Debapriya Sen & Konstantinos Serfes, 2015. "Patent Licensing and Entry Deterrence: The Role of Low Royalties," Economica, London School of Economics and Political Science, vol. 82, pages 1324-1348, December.
    6. Tarun Kabiraj, 2004. "Patent Licensing in a Leadership Structure," Manchester School, University of Manchester, vol. 72(2), pages 188-205, March.
    7. Matsumura, Toshihiro & Matsushima, Noriaki & Cato, Susumu, 2013. "Competitiveness and R&D competition revisited," Economic Modelling, Elsevier, vol. 31(C), pages 541-547.
    8. Mayra Rebolledo & Joel Sandonís, 2012. "The effectiveness of R&D subsidies," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 21(8), pages 815-825, November.
    9. Morton I. Kamien & Yair Tauman, 1986. "Fees Versus Royalties and the Private Value of a Patent," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(3), pages 471-491.
    10. Pal, Rupayan, 2010. "Technology adoption in a differentiated duopoly: Cournot versus Bertrand," Research in Economics, Elsevier, vol. 64(2), pages 128-136, June.
    11. Masahiko Hattori & Yasuhito Tanaka, 2016. "License or entry with vertical differentiation in duopoly," Economics and Business Letters, Oviedo University Press, vol. 5(1), pages 17-29.
    12. Boone, Jan, 2001. "Intensity of competition and the incentive to innovate," International Journal of Industrial Organization, Elsevier, vol. 19(5), pages 705-726, April.
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    14. La Manna, Manfredi M A, 1993. "Asymmetric Oligopoly and Technology Transfers," Economic Journal, Royal Economic Society, vol. 103(417), pages 436-443, March.
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    Cited by:

    1. Masahiko Hattori & Yasuhito Tanaka, 2018. "License and Entry Strategies for an Outside Innovator Under Duopoly with Combination of Royalty and Fixed Fee," Journal of Industry, Competition and Trade, Springer, vol. 18(4), pages 485-502, December.
    2. Hattori, Masahiko & Tanaka, Yasuhito, 2017. "Robustness of subsidy in licensing under vertical differentiation: General distribution and cost functions," MPRA Paper 78857, University Library of Munich, Germany.
    3. Carlo Capuano & Iacopo Grassi, 2020. "Imperfect patent protection, licensing, and willingness to pay for the innovation," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 47(2), pages 333-359, June.
    4. Hattori, Masahiko & Tanaka, Yasuhito, 2017. "Royalty and license fee under oligopoly with or without entry of innovator: Two-step auction," MPRA Paper 78858, University Library of Munich, Germany.

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    More about this item

    Keywords

    entry; license; duopoly; cost-reducing innovation; innovating firm; incumbent firm;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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