The Welfare Effects of Licensing Product-Differentiating Technology in a Commodity Market

An innovation that creates horizontal product differentiation is offered to downstream producers that face price competition in a homogeneous commodity market. Innovations can be single-product or multi-product technologies. Adopters of single-product technologies produce identical products, but their products are differentiated from the commodity product. Adopters of multi-product technologies differentiate their products from other adopters and non-adopters. Model results indicate that widespread licensing improves consumer and social welfare; however, the number of licensees that maximizes the patent owner's profits exceeds the number of licensees that maximizes consumer and social welfare.