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Fee versus Royalty Licensing in Bertrand Competition in the Presence of Trade Barriers

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Wen-Jung Liang

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Ching-Chih Tseng

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Working Paper

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This paper develops a barbell model to take into account trade barriers in exploring the outside patentee¡¦s optimal licensing policy under Bertrand competition with homogenous product. Four different policies, exclusive or non-exclusive royalty and fixed-fee licensing, are considered. The focus of the paper is on the impact of monopoly profit generated by trade barriers. It shows that fixed-fee licensing is superior to royalty licensing under Bertrand competition, as trade barriers relative to the innovation reduced marginal cost are higher, while the reverse emerges, otherwise. It also shows that the outside patentee would select fixed-fee licensing non-exclusively, as trade barriers relative to the innovation reduced marginal cost are higher.

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