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AbstractWe explore the incentives of a vertically integrated incumbent firm to license the production technology of its core input to an external firm, transforming the licensee into its input supplier. We find that the incumbent opts for licensing even when licensing also transforms the licensee into one of its direct competitors in the final products market. In fact, the licensee's entry into the final products market, although increases the competition and the cost that the licensor faces, it reinforces, instead of weakens, the licensing incentives. Furthermore, the licensee's entry augments the positive welfare implications of vertical licensing.JEL-Codes: L220, L240, L130, L420, D450.
We explore the incentives of a vertically integrated incumbent …rm to license the production technology of its core input to an external …rm. We …nd that it opts for licensing even when licensing induces the entry of the licensee in the …nal goods market.In fact, although the entry of the licensee reduces the licensor's e¢ ciency and the competition that it faces, it reinforces, instead of weakens, the licensing incentives.Vertical licensing is always welfare-enhancing and it is even more welfare-enhancing when it triggers entry.
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