Licensing in the Theory of Cooperative R&D

Licensing in the Theory of Cooperative R&D

Arijit Mukherjee (University of Nottingham, UK)
DOI: 10.4018/978-1-61692-006-7.ch009

Abstract

The literature on cooperative R&D did not pay much attention to knowledge sharing ex-post innovation through technology licensing, which is a common phenomenon in many industries. The author shows how licensing ex-post R&D affects the incentive for cooperative R&D and social welfare by affecting R&D investment and the probability of success in R&D. Licensing increases both the possibility of non-cooperative R&D and social welfare.
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The Case Of No Licensing

Consider an economy with two firms, called firm 1 and firm 2. Assume that these firms can produce a homogeneous product with a technology corresponding to the constant marginal cost of production . Both firms do R&D and each of them tries to reduce the cost of production to c, which is assumed to be zero for simplicity. However, success in R&D is uncertain. Assume that p and (1− p) show respectively unconditional probability of success and failure in R&D. We assume that both firms face the same probability of success in R&D. Assume that each firm affects the probability of success in R&D through its own R&D investment, i.e., p(xi), i = 1,2, where xi is firm i’s R&D investment. We consider that , , and for i = 1,2. We further assume that there are no fixed costs related to production and R&D.

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