Innovation Licensing to a Monopoly under Imperfect Competitive Upstream

This paper studies the cost-reducing and quality-improving innovation incentives of a downstream durable-good monopoly. The monopolist´s purpose is to maximize its profits under the assumption of an imperfect competitive upstream market. Then optimal licensing schemes for an outside quality-improving innovator are proposed. It is found that the monopolist only has quality-improving while but cost-reducing technical innovation incentives. Additionally, form the perspective of the innovator, optimal licensing schemes depend on the structure of upstream market, the minimum material supply price as well as the degree of the innovation. Specifically, for a monopoly upstream, if the minimum supply price is smaller, licensing by means of a fee and a royalty is superior; otherwise, fixed-fee licensing is better. While for the case of an upstream market of lager scale, if the magnitude of the innovation is smaller, royalty licensing is superior; otherwise, charging a fee and a royalty is optimal.