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Patent Licensing and Entry Deterrence: The Role of Low Royalties
Author(s) -
Duchêne Anne,
Sen Debapriya,
Serfes Konstantinos
Publication year - 2015
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/ecca.12141
Subject(s) - deterrence theory , business , industrial organization , welfare , barriers to entry , consumer welfare , commerce , economics , market structure , market economy , physics , nuclear physics
We study how an incumbent patent holder can use licensing strategically to reduce the threat of further entry, through a low royalty. This licensing strategy deters entry by making the terms of future licensing agreements less favourable to potential entrants. Strategic licensing induces a trade‐off between a more concentrated market and a lower price. When this strategy is profitable for the patent holder, it is welfare enhancing if and only if the entry cost is high, or the efficiency edge of the technology is significant. Our analysis yields new policy implications (e.g. royalty floor) with respect to strategic licensing.