Licensing Quality-Improving Technologies to a Vertically-Differentiated Market

Abstract

We analyze an independent patent holder's licensing of two kinds of quality-improving technologies to a vertically-differentiated duopoly. We find for both types of technologies that in equilibrium, the patent holder chooses the licensing fee in such a way that only one firm purchases the license. That is, the equilibrium licensing outcome is characterized by an exclusive licensing deal, even though an exclusivity clause is not explicitly imposed. Moreover, we show that depending on the nature of quality-improving technologies available for licensing, both persistence and reversal of quality leadership may arise. In particular, the licensing of a history-dependent technology will result in a persistence of market leadership, whereas the licensing of a history-independent technology will result in a reversal of market leadership.