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Vertical differentiation in oligopoly and license fees when outside innovator can enter the market: Two‐step auction
Author(s) -
Hattori Masahiko,
Tanaka Yasuhito
Publication year - 2018
Publication title -
metroeconomica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.256
H-Index - 29
eISSN - 1467-999X
pISSN - 0026-1386
DOI - 10.1111/meca.12184
Subject(s) - license , oligopoly , quality (philosophy) , product differentiation , business , industrial organization , credibility , microeconomics , product (mathematics) , duopoly , reverse auction , innovator , economics , cournot competition , common value auction , entrepreneurship , computer science , finance , philosophy , geometry , mathematics , epistemology , political science , law , operating system
Abstract When an outside innovating firm has a technology to produce a higher quality good than the good produced at present, it can sell licenses of its technology to incumbent firms, or enter the market and at the same time sell licenses, or enter the market without license. We examine the definitions of license fee in such a situation in an oligopoly with three firms under vertical product differentiation, one outside innovating firm and two incumbent firms, considering threat by entry of the innovating firm using a two‐step auction. We show that in the case of uniform distribution of consumers' taste parameter and zero cost when the quality improvement (the difference between the quality of the high‐quality good and the quality of the low‐quality good) is small (or large), the two‐step auction is (or is not) credible, and license to two firms without entry strategy (or entry without license strategy) is optimal depending on credibility of the two‐step auction.