Optimal licensing contracts with a downstream oligopoly: insider versus outsider innovation

Patent licensing for signaling the cost‐reduction innovation: The case of the insider innovator

“…This result is similar to Sen and Tauman (2007) and Tsai and Wu (2022), where the first‐best contract is pure‐royalty under complete information, and the insider innovator will license both rival firms. Intuitively, since the insider innovator can produce by itself and compete with the downstream firms by using the superior technology, the benefit from the industry profit is more important.…”

“…Under complete information, the optimal contract is pure‐royalty and nonexclusive, as shown by Sen and Tauman (2007) and Tsai and Wu (2022). When information is incomplete, the signaling concerns arise.…”

“…The current model can be extended at least in the following three directions: First, we may consider the general case with $$n\ge 3$$ downstream firms. Under insider innovation, Tsai and Wu (2022) show that the optimal contract under complete information is the one that makes all downstream firms accept it, which is either fee‐only or two‐part. When information is incomplete, it is necessary for the H type to commit to some suboptimal contracts to signal itself.…”

“…Under complete information with two downstream firms, as has been shown by Sen and Tauman (2007), Erutku and Richelle (2007), and Tsai and Wu (2022), it is best for both the insider and outsider innovators to offer a nonexclusive contract; however, their optimal contracts are different. The insider innovator prefers a pure‐royalty contract, while it is optimal for the outsider innovator to offer either a fee‐only contract or a two‐part contract.…”