Vertical Integration And Technology Licensing

Using a bilateral duopoly model between upward and downward industries, thisdissertation analyzes how a patent holder chooses the types of technology diffusion:vertical licensing (and) or vertical integration, and the welfare properties oftechnology licensing and (or) vertical integration via vertical relationships. To bespecific, the following four aspects are:First, in a bilateral Cournot model where two downward firms produce ahomogenous good, we analyze how a downward firm licenses its cost-reducinginnovation to upward firm(s). It is shown that, depending on both the types oflicensing contract and innovation size, equilibrium licensing could be either exclusiveor non-exclusive. Moreover, from the perspective of patent holder, royalty licensing isnot always superior to fixed-fee licensing. In addition, two-part tariff licensing isoptimal for the patent holder, and licensing improves social welfare.Second, we consider a vertically related market with two upstream producersand two downstream producers, where upstream firms compete against each other ala Bertrand and downstream firms compete against a la Cournot. It is shown that,under royalty contract or two-part tariff contract, selling license to both upward firmsis better, but under fixed fee contract, licensing to one upward firm is better.Moreover, from the perspective of patent holder, licensing by means of royaltycontract is superior to by means of a fixed fee, and licensing by means of royaltycontract is the same to two-part tariff contract. In addition, technology licensing hurtsboth consumers and the society, if the innovation is small.Third, in a bilateral duopoly model where a downstream firm owns acost-reducing innovation, this paper analyzes the welfare properties of backwardintegration and technology licensing via vertical relationships. We assume thatupstream firms compete against each other either a la Cournot or a la Bertrand, anddownstream firms competing in Cournot fashion produce a homogenous good. It isshown that, depending on both upstream competition mode and innovation size,equilibrium licensing could be either exclusive or non-exclusive, with a contract including either a fee, or a royalty, or both, and equilibrium integration could also beeither exclusive or non-exclusive. Moreover, for the patent holder and social welfare,backward integration is always superior to patent licensing. In addition, patentlicensing could lead to lower industry profit, higher consumer surplus and highersocial welfare under upstream Cournot competition than under upstream Bertrand.Last, using a bilateral Cournot model where two downward firms produce ahomogenous good, we analyze how a upward firm transfers its cost-reducinginnovation to downward firm(s). It is shown that, under fixed fee contract or forwardintegration, equilibrium licensing and integration could be either exclusive ornon-exclusive. Under royalty contract and two-part tariff contract, equilibriumlicensing is non-exclusive. Moreover, from the perspective of patent holder, royaltylicensing is superior to fixed-fee licensing, if the innovation is small. In addition, inlicensing contracts, two-part tariff is optimal for the patent holder, but licensing maylowers social welfare. In addition, it could lead to lower industry profit, consumersurplus and social welfare under patent licensing than under forward integration.