Impact of technology development costs on licensing form in a differentiated Cournot duopoly

• Author: Yasushi Masuda,Tatsuya Kitagawa,Masashi Umezawa
• Date: 01 June 2020
• Published date: 01 June 2020
• DOI: http://doi.org/10.1111/ijet.12175

doi: 10.1111/ijet.12175

Impact of technology development costs on licensing form in a

differentiated Cournot duopoly

Tatsuya Kitagawa,∗Yasushi Masuda†and Masashi Umezawa‡

Weinvestigate how the type of innovation, either of product or process, influences the licensing

scheme. For product innovation, we consider a licensing scheme for a patent holder of a new

product facing a potential rival who may invest in technology innovation and enter the market

for the new product. The alternative forms of licensing schemes considered are fixed fees and

royalties. We then compare this licensing scheme for product innovation with that for process

innovation studied in the literature.

Key wor ds fixed-fee licensing, royalty licensing, incumbent innovator, product innovation,

Cournot duopoly

JEL classification D21, D45, L19

Accepted 25 October 2017

1 Introduction

In the literature on innovation, it is customary to distinguish two types of innovation: product and

process innovation (see, for example, Bonanno and Haworth1998). The literature on licensing, how-

ever, focused historically mostly on process innovation. This paper answers the following question:

does the type of innovation (product or process) influence the form of licensing? Wang (2002) in-

vestigates the issue of fee versus royalty licensingfor the case of process innovation in a differentiated

Cournot duopoly. We employ the model of product innovation in a differentiated Cournot duopoly

considered by Kitagawaet al .(2014) and investigate the licensing in the framework of fixed-fee versus

royalty licensing. Specifically, we evaluate two licensing schemes, fixed-fee and royalty licensing, as

tools for an incumbent innovator to license the technology for a new product to a potentialcompeti-

tor, who then has the option of self-developing the technology for a comparable product without

patent infringement. Wethen compare our result with Wang (2002) and answer the aforementioned

question in the framework of fee versus royalty licensing.

Early work on patent licensing can be traced back to Arrow (1962), who argued that a perfectly

competitive industry provides a greater incentiveto innovate than a monopoly. Kamien and Tauman

(1984, 1986) and Katz and Shapiro (1985, 1986) are other early studies that analyzed licensing

policies. For the most part, this early literature mainly focused on the licensing of a cost-reducing

innovation by a firm specializing in research and development (R&D) whose sole objective is to

∗Sanofi K.K., Shinjuku, Tokyo, Japan.

†Faculty of Science and Technology, Keio University,Yokohama, Kanagawa, Japan.

‡Department of Business Economics, TokyoUniversity of Science, Chiyoda, Tokyo,Japan. Email: umezawa@rs.tus.ac.jp

The authors have benefited from the comments of an anonymous referee. The second author is supported by JSPS

KAKENHI 15K01203. The third author is supported by JSPS KAKENHI 26380320.

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