Licensing in the Theory of Innovation

TLDR

The article investigates the incentives for licensing production technology and its effects on innovation patterns, industry costs, and market structure in a noncooperative R&D game. Licensing contracts generate benefits by replacing inefficient production methods and eliminating wasteful research expenditures. In a duopoly, licensing promotes research when firms’ initial technologies are cost‑similar but hinders it when costs are asymmetric.

Abstract

This article analyzes licensing in a noncooperative R&D game. We ask two questions. What are the incentives for licensing a production technology and what is the impact of licensing on the pattern of innovation and the consequent evolution of industry costs and market structure? The gainsfrom trading information through licensing contracts are achieved through the replacement of inefficient production techniques (the ex post incentive) and the elimination of inefficient research expenditures (the ex ante incentive). In a duopoly the availability of licensing encourages research when the firms' initial production technologies are close in costs and discourages research when initial costs are asymmetric.