Product Innovation in a Vertically Differentiated Model

Abstract

We study the licensing incentives of an independent input producer owning a patented product innovation which allows the downstream …rms to improve the quality of their …nal goods. We consider a general two-part tari¤ contract for both outside and incumbent innovators. We …nd that technology di¤ usion critically depends on the nature of market competition (Cournot vs. Bertrand). Moreover, the vertical merger with either downstream …rm is always privately pro…table and it is welfare improving for large innovations: this implies that not all pro…table mergers should be rejected.

The Market Structure Simulation of Heterogenous Firms

“…Meanwhile, Filippini and Vergari (2012) showed that in the competition of Bertrand differentiated goods oligopolistic companies, innovation owners are not interested in disseminating knowledge but prefer granting exclusive innovation rights based on licences, which promotes product differentiation. Brander and Spencer (2015) showed that Bertrand companies are always more likely to differentiate their products than Cournot companies, while Bertrand companies are less efficient.…”