Signaling in Technology Licensing with a Downstream Oligopoly
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Signaling in Technology Licensing with a Downstream Oligopoly Cheng-Tai Wu1 • Cheng-Hau Peng1 • Tsung-Sheng Tsai2 Accepted: 14 September 2020 Ó Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract We analyze licensing contracts in an oligopolistic downstream market where an outside innovator has private information with regard to its technology. Under complete information, the innovator uses a fee-only or a two-part contract to extract the rent that is generated from its innovation, so that all of the downstream firms receive nothing but their reservation payoff. By contrast, under incomplete information with respect to the efficiency of innovation, there can be a conflict between signaling and rent extracting: A contract by the efficient innovator that extracts too much rent invites the inefficient innovator to mimic it. In this case, the efficient type may give up charging the fixed fee and offer a royalty-only contract, so as to discourage the mimicking. Moreover, when the downstream market is sufficiently competitive, the royalty-only contract will eventually win vis-a-vis the two-part contract because it is more effective for the efficient type to signal itself. Keywords Signaling Technology licensing Downstream oligopoly
JEL Classification D43 D45 D82
& Tsung-Sheng Tsai [email protected] Cheng-Tai Wu [email protected] Cheng-Hau Peng [email protected] 1
Department of Economics, Fu Jen Catholic University, No. 510, Zhongzheng Road, Xinzhuang, New Taipei City 24205, Taiwan
2
Department of Economics, National Taiwan University, No. 1, Sec. 4, Roosevelt Road, Daan, Taipei 10617, Taiwan
123
C.-T. Wu et al.
1 Introduction An innovator develops a technology that can reduce the cost of the manufacturers that produce a good in a product market. A licensing contract bridges the gap between the innovator and the manufacturers: The latter can make use of the new technology by paying the former. However, there may exist information asymmetry with regard to the quality of the technology between the licensor and the licensees. Naturally, a more efficient innovator that owns a better technology wishes to signal its type in order to be distinguished from the less efficient one. It is then important to study the signaling role of the licensing contracts that are offered by the innovator, which is the main purpose of this paper. Almost all of the studies on licensing with incomplete information assume a monopolistic downstream market. This paper develops a model that has not been studied before: An outside innovator with private information sells a license to the downstream firms in an oligopolistic market. This is an important step because it enables us to understand questions such as how the downstream market structure affects licensing contracts under incomplete information. Moreover, the new consideration of the downstream firms’ participation constraint in the licensing contract is different from the typical signaling models where the inc
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