Intra-brand patent licensing with inter-brand competition

Abstract

The existing literature has considered licensing of a patented cost-reducing innovation either in a homogeneous good industry or in a differentiated goods industry. We consider a new model of patent licensing between producers of a homogeneous good when there is competition from producers of another brand in the market. We find that for drastic innovation, the optimal intra-brand patent licensing involves only fixed fee when the degree of inter-brand differentiation is low and a two-part tariff otherwise. For non-drastic innovation, the optimal intra-brand patent licensing involves only royalty when the degree of inter-brand differentiation is high, a two-part tariff when it is intermediate, and finally a fixed fee alone when it is low. We also establish that the innovator has more incentive for innovation as an insider than an outsider of this market.