Technology Licensing In Vertical Related Markets

Using oligopoly model, this paper studies the patentee’s decision on technology licensing and merger.First, based on duopoly Cournot and Stackelberg competition models, this paper studies whether an outside patent holder prefers to license its quality-improving innovation as an external patentee or to merge with one of the firms in the industry, licensing its innovation as an internal patentee, and re-examines the impacts on social welfare. It is found that, if the degree of innovation is high (low), the patent holder prefers licensing the innovation as an internal (external) patentee, which is in contrast to the argument by Sandonis and Fauli-Oller (2006). Moreover, compared with licensing as an external patentee, licensing as an internal patentee generates higher consumer surplus and social welfare. Thus in this year’s NPC&CPPCC, proposal on merger is an act of wisdom.Second, in an economic model, where the upstream and downstream firms are both monopoly, we analyze the bargaining power’s effect on external patentee’s licensing decision. It is found that, the patentee’s optimal license contract depends on bargaining power; the consumer surplus and social welfare are the results of innovation level, bargaining power and license contrants.Third, this paper finds out that whether the internal patentee should license its patent technology and whether the internal patentee should produce with patent technology or with initial technology depends on the innovation level and license contracts. Moreover, if the patentee produces by the initial technology, the social welfare will not be improved, even be deteriorated; on the contrary, if the patentee produces with the patent technology, the social welfare will be improved. In addition, whether the fixed fee is superior to per unit-royalty depends on the innovation level.Fourth, we develop vertical market models, where two downstream firms compete in Cournot fashion, two upstream firms compete in Cournot and Stackelberg fashions separately, and one of the upstream firm owns a quality-improving patent technology. We compare licensing with merger, and compare per-unit royalty with ad valorem royalty. We find that if the license fee is negative, the patentee licensing by two-part tariff may become upstream monopoly, just the same as merger. In addition, if the patentee is a follower in Stackelberg fashion, and licenses to the leader, then per-unit royalty is superior to ad valorem royalty, which is different with the proposition raised by Martin and Saracho (2010,a).