| By: |
Antelo, Manel;
Bru, Lluís |
| Abstract: |
This paper examines the commercialization of an external, quality-enhancing
(product) innovation within a vertically related market, comparing outright
sale and licensing. Licensing may involve a royalty of per-unit or ad valorem
type and potential adopters are two downstream firms that source a core input
from a single upstream supplier. The analysis reveals that the patentholder’s
incentive to license the innovation, particularly through per-unit royalties,
outweighs that of an outright sale. This form of technology transfer, however,
is shown to potentially reduce consumer and social welfare compared to the
pre-innovation state, thus providing a rationale for public policy
interventions aimed at restricting royalty-based technology transfer. |
| Keywords: |
Vertical industry, quality-enhancing product innovation, sale versus licensing, two-part tariff contracts, per-unit royalty, ad-valorem royalty, welfare |
| JEL: |
L13 O32 |
| Date: |
2025–09 |
| URL: |
https://d.repec.org/n?u=RePEc:pra:mprapa:126850 |