Discussion paper

DP2284 Licensing the Market for Technology

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.


Arora, A and A Fosfuri (1999), ‘DP2284 Licensing the Market for Technology‘, CEPR Discussion Paper No. 2284. CEPR Press, Paris & London. https://cepr.org/publications/dp2284