Competition, Product Innovation and Licensing
Journal
B.E. Journal of Economic Analysis and Policy
Journal Volume
17
Journal Issue
1
Date Issued
2017
Author(s)
Abstract
This paper compares market profit and social welfare levels between differentiated Bertrand and Cournot duopoly. We start with a basic model in which a firm with a production technology can license its new technology to a potential rival who can use the technology to produce a differentiated product and compete with the incumbent firm. It is found that for any given technology level, Bertrand competition is necessarily more profitable but less socially desirable, due to its higher royalty rate. By contrast, if the licensee firm is an incumbent firm, the results hold if the technology level is high. Furthermore, if we assume the licensor firm can engage in product innovation and choose its optimal technology endogenously and the R&D efficiency is high (low), the welfare ranking is reversed (still holds). © 2017 by De Gruyter 2017.
Subjects
Bertrand versus Cournot competition; licensing; product RandD; welfare
SDGs
Type
journal article