Eco-Technology Licensing under Emission Tax: Royalty vs. Fixed-Fee

This article considers the licensing strategies of eco-technology when an innovator provides pollution abatement goods to oligopolistic polluting firms that produce consumption goods and emit environmental pollutants. In the presence of emission tax, two types of licensing contracts, royalty and fixed-fee, are examined to analyze market equilibrium and to compare their welfare consequences. We show that an eco-innovator provides a non-exclusive license under a royalty contract while it might exclude polluting firms under the fixed-fee licensing contract. However, when mixed licensing contract where royalty and fixed-fee contracts are combined together is available, we show that eco-innovator provides non-exclusive license. We also show that, compared to royalty licensing, exclusive fixed-fee contract will increase the welfare but its welfare effect depends on the level of emission tax. Finally, we derive the optimal emission tax and show that an appropriate emission tax combined with non-exclusion policy or profit-cap regulation can increase the welfare.