DP2284 Licensing the Market for Technology

Author(s): Ashish Arora , Andrea Fosfuri

Publication Date: November 1999

Keyword(s): Licensing , Market Structure , Oligopoly Theory

JEL(s): D23 , D43 , L13

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP2284.asp

In technology-based industries, incumbent firms often license their technology to other firms that will potentially compete with them. Such a strategy is difficult to explain within traditional models of licensing. This paper extends the literature on licensing by relaxing the assumption of a monopolist technology holder. We develop a model with many technological trajectories for the production of a differentiated good. We find that competition in the market for technology induces licensing of innovations, and that the number of licenses can be inefficiently large. A strong testable implication of our theory is that the number of licenses per patent holder decreases with the degree of product differentiation.