Royalty Model Research on Horizontal Differentiation Product Market

This paper develops a three stage static game model. In this model, firstly we assume that two firms develop pricing competition of Bertrand, and then research the possibility of royalty in different technology innovation environment. The conclusion is: the success of patent licensing is related to decreasing extent of unit production cost brought by patent; the more decreased in the unit production cost, the more the price will drop, the larger lose in market share and the profit, therefore the patent holder will require more royalty, however, if the royalty is too high, the buyer may not bear it. Therefore, only when unit production decrease in a certain extent, it can be accepted by both firm, and patenting licensing can be succeed