Technology licensing in a differentiated oligopoly

Abstract

We show the effects of product differentiation and competition on technology licensing by an outside innovator. Both the innovator and the society are better off under royalty licensing compared to auction (or fixed-fee) if the number of potential licensees is sufficiently large, irrespective of Cournot and Bertrand competition. We find that the relationship between product differentiation and the minimum number of potential licensees that is required to make royalty licensing profitable to the innovator is non-monotonic under Cournot competition, while it is positive under Bertrand competition. Hence, there are degrees of product differentiation for which neither the innovator nor the antitrust authority requires information about the type of product market competition while deciding on the licensing contract. It follows from our analysis that the innovator prefers auction plus royalty licensing (or fixed-fee plus royalty) over either royalty licensing or auction.Auction; Licensing; Royalty; Product Differentiation