On the Licensing of Innovations

TLDR

The study investigates a three‑stage asymmetric duopoly model comprising R&D, fixed‑fee licensing, and final product sales. The authors analyze this model as a game with sequential stages: R&D, licensing, and product sale. The analysis shows that major innovations are rarely licensed, while equally efficient firms tend to license minor ones; licensing can be privately or socially undesirable, may be blocked if a firm refuses to license, and can reduce overall innovation returns when licensees capture most gains.

Abstract

We study a three-stage, asymmetric duopoly game of RD (2) fixed-fee licensing of the innovation; and (3) sale of the final product. We find that major innovations will not be licensed, but that equally efficient firms will tend to license minor innovations. For some innovations, licensing is both privately and socially undesirable. If at least one of the two producers would refuse to license (were it to acquire the innovation), then licensing will not occur; an excluding firm will obtain the innovation. The possibility of licensing may decrease the returns to innovation if the licensee appropriates most of the licensing gains to trade.