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The B.E. Journal of Economic Analysis & Policy

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Volume 17, Issue 1 (Feb 2017)

Issues

Volume 6 (2006)

Volume 4 (2004)

Volume 2 (2002)

Volume 1 (2001)

Competition, Product Innovation and Licensing

Ray-Yun Chang
  • Department of Economics, Chinese Culture University, Taipei, Taiwan
/ Hong Hwang
  • Department of Economics, National Taiwan University, Taipei, Taiwan
  • RCHSS, Academia Sinica, Taiwan
/ Cheng-Hau Peng
  • Corresponding author
  • Department of Economics, Fu Jen Catholic University, Taipei, Taiwan
  • Email:
Published Online: 2017-02-23 | DOI: https://doi.org/10.1515/bejeap-2016-0136

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).

Keywords: Bertrand versus Cournot competition; licensing; product R&D; welfare

JEL Classification: D43; D45; L13; L24

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About the article

Published Online: 2017-02-23



Citation Information: The B.E. Journal of Economic Analysis & Policy, ISSN (Online) 1935-1682, ISSN (Print) 2194-6108, DOI: https://doi.org/10.1515/bejeap-2016-0136. Export Citation

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