BUSCADOR RECOLECTA

We consider licensing of a non-drastic innovation by a licensor that interacts with a potential licensee in a Stackelberg duopoly, comparing per-unit and ad-valorem royalty two-part contracts and showing why and when each licensing deal should be used. We contribute three findings to the literature. First, ad-valorem royalty is preferred when the licensor plays as leader in the marketplace, but per-unit royalty is preferred when the licensor plays as follower. Second, only innovations that do not hurt consumers are socially beneficial. Third, our model also suggests that both the licensor’s status as a leader or follower in the marketplace and the innovation size determine the incentive to engage in innovative activities

This study investigates the licensing of a cost-reducing innovation by a firm to its direct competitor in a Stackelberg-differentiated duopoly. We find that the licensor's market position coupled with the product's nature and innovation size play an important role in framing the licensing agreement and its welfare impact. When acting as the market leader in determining output, the licensor offers its competitor a pure ad valorem royalty contract if the products are close substitutes for each other or if the innovation is sufficiently large in the case of distant substitutes; otherwise, a per-unit royalty combined with a fixed fee is preferred. However, if the licensor acts as a follower in the product market, the licence comprises a per-unit royalty, sometimes combined with a fixed payment. Compared with the pre-licensing context, licensing by a market follower is never welfare-reducing, whereas licensing by a market leader is only welfare-reducing when products are extremely close substitutes. Optimal licensing with complementary products is also studied, which could result in a per-unit subsidy.

We evaluate the incentives to create within-industry independent divisions once the vertical structure of the industry is considered. Divisionalization allows a firm to gain market share in the final market, but it also leads to an increase in total payments to the input supplier. The less competitive the upstream market, the more important the second effect will be, and this reduces the profitability of divisionalization. As a consequence, a less competitive upstream segment leads to a lower total number of divisions in equilibrium and a less competitive final market, harming end consumers who will face higher prices., Conselleria d'Educació, Investigació, Cultura i Esport. Grant Number: Prometeo/2021/073. Spanish Ministry of Economy and Innovation. Grant Numbers: PID 2020-115018RB-C33, PID2021-127736NB-I00, PID2022-142356NB-I00. Funding for open access charge: Universidad de Málaga / CBUA.