DP2284 Licensing the Market for Technology

Author(s):	Ashish Arora, Andrea Fosfuri
Publication Date:	November 1999
Keyword(s):	Licensing, Market Structure, Oligopoly Theory
JEL(s):	D23, D43, L13
Programme Areas:	Industrial Organization
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=2284

In technology-based industries, incumbent firms often license their technology to other firms that will potentially compete with them. Such a strategy is difficult to explain within traditional models of licensing. This paper extends the literature on licensing by relaxing the assumption of a monopolist technology holder. We develop a model with many technological trajectories for the production of a differentiated good. We find that competition in the market for technology induces licensing of innovations, and that the number of licenses can be inefficiently large. A strong testable implication of our theory is that the number of licenses per patent holder decreases with the degree of product differentiation.