License or entry with vertical differentiation in duopoly

2018

J Ind Compet Trade

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We consider a choice of options for an innovating firm to enter the market with or without licensing its new cost-reducing technology to the incumbent firm using a combination of a royalty per output and a fixed license fee, or to license its technology without entry. With general demand and cost functions we show the following results. When the innovating firm licenses its technology to the incumbent firm without entry, the optimal royalty rate per output for the innovating firm is zero with negative fixed fee, and when the innovating firm enters the market and at the same time licenses its technology to the incumbent firm, the optimal royalty rate is positive with positive or negative fixed fee. Also we show that when cost functions are concave, the optimal royalty rate is one such that the incumbent firm drops out of the market and license without entry strategy and entry with license strategy are optimal for the innovator; and when cost functions are strictly convex, there is an internal solution of the optimal royalty rate under duopoly and entry with license strategy is optimal for the innovator.

Section: Quadratic Cost Functionsmentioning

confidence: 99%

License and Entry Strategies for an Outside Innovator Under Duopoly with Combination of Royalty and Fixed Fee

2018

J Ind Compet Trade

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“…Hattori and Tanaka () studied the adoption of new technology in Cournot duopoly and Stackelberg duopoly. Rebolledo and Sandonís () presented an analysis of the effectiveness of research and development (R&D) subsidies in an oligopolistic model in the cases of international competition and cooperation in R&D. Hattori and Tanaka () analyzed problems about product innovation, that is, introduction of higher quality good in a duopoly with vertical product differentiation.…”

Section: Literature Reviewmentioning

confidence: 99%

“… Hattori and Tanaka () presented an analysis of license and entry choice by an innovating firm in a duopoly under vertical product differentiation.…”

mentioning

confidence: 99%

Vertical differentiation in oligopoly and license fees when outside innovator can enter the market: Two‐step auction

2017

Metroeconomica

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When an outside innovating firm has a technology to produce a higher quality good than the good produced at present, it can sell licenses of its technology to incumbent firms, or enter the market and at the same time sell licenses, or enter the market without license. We examine the definitions of license fee in such a situation in an oligopoly with three firms under vertical product differentiation, one outside innovating firm and two incumbent firms, considering threat by entry of the innovating firm using a two-step auction. Also we show that in the case of uniform distribution of consumers' taste parameter and zero cost when the quality improvement (the difference between the quality of the high-quality good and the quality of the low-quality good) is small (or large), the two-step auction is (or is not) credible.

“…In Hattori and Tanaka (2016b), using an alternative definition of license fee taking the above point into account, involving only a fixed license fee and new technology for producing a higher‐quality good under vertical product differentiation, the following results on duopoly with uniform distribution of consumers’ taste parameter have been shown. Linear cost functions (constant marginal costs).…”

Section: Introductionmentioning

confidence: 99%

License and entry strategies for an outside innovator in Stackelberg duopoly with royalty and fixed fee under vertical differentiation**

Int J of Economic Theory

2019

Self Cite

We examine a choice of options for an outside innovating firm in Stackelberg duopoly under vertical differentiation. The options for an innovating firm are to enter the market with or without licensing its technology for producing a higher‐quality good by a combination of royalty and fixed license fee, and to license its technology without entry. When the innovating firm licenses its technology to the incumbent firm without entry, its optimal royalty rate is zero. When the innovating firm enters the market with a license to the incumbent firm, and the cost function is strictly concave, its optimal royalty rate is one such that the incumbent firm drops out of the market with a negative fixed license fee. If the cost function is strictly convex, there is an internal solution of the positive optimal royalty rate with positive or negative fixed license fee. Without entry cost, if the cost function is strictly concave, the entry without license and entry with license strategies are optimal, and if it is strictly convex, the entry with license strategy is optimal.