Optimal Licensing Policy for an Incumbent Firm with Fixed Cost Advantage

This paper primarily focuses on two problems which aim at improving the results of the recent work of Yi S.S.(Yi S.S., Entry, licensing and research joint ventures, International Journal of Industrial Organization, 1999,17:1 24).Firstyly, two improper viewpoints are pointed out and rectified. Under his model, Yi argued that the potential entrants can be better off or worse off under the incumbent firm’s strategic use of ex post licensing policy, but it is shown in this paper that the strategic licensing undoubtedly reduces the entrants’expected payoffs. Yi also noted wrongly that industry profit is a convex function of the number of firms in the product market by the Cournot oligopoly with a linear demand and constant marginal costs. However, in this paper it is demonstrated that industry profit in such a market is a concave convex function of the number of firms. Secondly, a thorough study of the optimal licensing policy for the incumbent is made on the basis of the correction of the second error. Necessary and sufficient conditions under which the incumbent will choose ex post licensing, ex ante licensing of one entrant or ex ante licensing of both extrants are given.