Licensing and Innovation with Imperfect Contract Enforcement
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Date
2015-03Metadata
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- Discussion papers (SAM) [663]
Abstract
Licensing promotes technology transfer and innovation, but enforcement of licensing
contracts is often imperfect. We explore the implications of weak enforcement of contractual
commitments on the licensing conduct of firms and market performance. An
upstream firm develops a technology that it can license to downstream firms using a fixed
fee and a per-unit royalty. Strictly positive per-unit royalties maximize the licensor’s profit
if competition among licensees limits joint profits. Although imperfect contract enforcement
lowers the profits of the upstream firm, weak enforcement lowers prices, increases
downstream innovation, and in some circumstances can increase total economic welfare.