Vertical licensing, input pricing, and entry

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Vertical Licensing, Input Pricing, and Entry Terms of use: Documents in EconStor may AbstractWe explore the incentives of a vertically integrated incumbent firm to license the production technology of its core input to an external firm, transforming the licensee into its input supplier. We find that the incumbent opts for licensing even when licensing also transforms the licensee into one of its direct competitors in the final products market. In fact, the licensee's entry into the final products market, although increases the competition and the cost that the licensor faces, it reinforces, instead of weakens, the licensing incentives. Furthermore, the licensee's entry augments the positive welfare implications of vertical licensing.JEL-Codes: L220, L240, L130, L420, D450.

Foreign direct investment in vertically related markets

“…In light of this, U has incentives to prevent the MNE's entry only when it is through greenfield investment and its bargaining power is not sufficiently high or final products are too close substitutes. U could do so by lobbying with the host country's government so that stricter restrictions and higher costs are imposed on greenfield investment, by integrating forward and (partially) foreclosing the MNE (Bakaouka and Milliou ) or by establishing its own downstream firm and intensifying downstream competition.…”

Essays in industrial organization

“…Most of the literature on technology licensing analyzes various aspects of licensing in one-tier markets, such as the choice among licensing fee and royalties (e.g., Kamien and Tauman, 1986, Muto, 1993, Wang, 1998, the use of licensing for entry deterrence (Gallini, 1984), the impact of licensing on innovation (e.g., Gallini and Winter, 1985), and the choice among licensing and merger (Fauli-Oller and Sandonis, 2003). Our paper is closely related to the limited literature that examines licensing in vertically related markets, such as Mukherjee (2003), Arya and Mittendorf (2006), Mukherjee and Ray (2007), Rey and Salant (2012), Bakaouka and Milliou (2018). This literature shows that horizontal licensing in the downstream market is pro…table only if it enhances competition in the upstream market (Mukherjee, 2003) or if it creates a weak rival (Arya and Mittendorf, 2006).…”

“…One of them, without loss of generality …rm 1, considers licensing its input production technology to an external …rm, …rm S, for a …xed licensing fee, F 0. 8 When licensing takes place, the licensee (…rm S) is in the position to produce the licensor's (…rm 1's) input at marginal cost c. 9 The knowledge that …rm S acquires through licensing regarding the production of the …nal good's core input could also allow it to produce the …nal good. Thus, licensing could cause …rm S's entry into the …nal goods market too.…”

“…We assume that …rm I bargains with each downstream …rm simultaneously and separately and that during the negotiations of a bargaining pair, each of its agents takes as given the outcome of the simultaneously-run negotiations of the other bargaining pair. 9 To avoid the multiple equilibria that can arise due to the multiplicity of the beliefs that the downstream …rms can form when they receive out-of-equilibrium o¤ers, we impose pairwise proofness on the equilibrium contracts. 10,11 In the last stage, the …rms which are active in the 7 We implicitly assume that in order to serve a downstream customer, …rm I has to undertake investments in order to increase the size of its input production facilities or to open new input production lines.…”

“…This literature shows that horizontal licensing in the downstream market is pro…table only if it enhances competition in the upstream market (Mukherjee, 2003) or if it creates a weak rival (Arya and Mittendorf, 2006). Bakaouka and Milliou (2018) deal instead with vertical licensing and show that it is pro…table even when it can trigger entry of the upstream licensee in the downstream market. In contrast to these papers, we examine the incentives for horizontal licensing in the downstream market when the input supplier is a vertically integrated …rm that competes downstream both with the licensor and the licensee.…”