Licensing the market for technology

Abstract

In technology-based industries, incumbent firm often license their technology to potential competitors. Such a strategy is difficul to explain within traditional models of licensing. This paper extends the literature on licensing by relaxing the assumption of a monopolist technology holder. Competition in the market for technology induces licensing of innovations and incumbent firm may fin it privately profitabl to license although their joint profit may well be higher in the absence of any licensing. A strong testable implication of our model is that the number of licenses per patent holder decreases with the degree of product differentiation.