To merge or to license:: implications for competition policy

The optimal competition policy when licensing is an alternative to a merger to transfer a superior technology is derived in a differentiated goods duopoly, for the cases of Cournot and Bertrand competition. We show that whenever both royalties and fixed fees are feasible, mergers should not be allowed, which fits the prescription of the US Horizontal Merger Guidelines. By contrast, when only one instrument is feasible, be it fixed fees or royalties, the possibility of licensing cannot be used as a definitive argument against mergers. (C) 2002 Elsevier Science B.V. All rights reserved.