Abstract
This paper examines the welfare effect of third-degree input price discrimination in the presence of technology licensing by an outside innovator. It is found that discriminatory pricing induces the innovator to issue more licenses to downstream firms which improves the overall production efficiency of the downstream market and makes discriminatory pricing more socially desirable than uniform pricing. However, if the level of innovation is endogenously determined by the outside innovator, price discrimination suppresses his R&D incentive, which reduces the social welfare and makes the welfare effect of price discrimination ambiguous.
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