A Welfare Analysis of Licensing under Rent Dissipation

Abstract

This paper studies how technology transfer changes welfare in a Cournot oligopoly, taking rent dissipation into account. Firms engage in a patent competition for a cost-reducing innovation, and the winner of the competition may license the patent to its rivals. We show that welfare is reduced when innovations are minor under licensing auction, while royalty licensing never changes welfare. In addition, welfare generally fails to improve when the patentee may choose between licensing auction and royalty licensing.