ON TECHNOLOGY LICENSING IN A STACKELBERG DUOPOLY

Abstract

This paper finds that in a linear Stackelberg duopoly model, the follower is more likely to license a cost‐reducing innovation to the leader than the leader is to the follower, regardless of whether licensing is in the form of a fixed fee or royalty per unit of output. Under fixed‐fee licensing, the follower gains more from small innovations while the leader gains more from large non‐drastic innovations. Under royalty licensing, the follower always gains more than the leader from an innovation.