Partial acquisition and patent licensing in an asymmetric duopoly

Abstract

This paper analyzes partial ownership arrangements in a heterogenous-goods duopoly market with subsequent two-part tariff licensing. The equilibrium under patent licensing is inefficient in the sense that there is an excessive concentration of production in the licensor. A partial ownership arrangement, under which the low-cost firm holds a partial interest in the high-cost firm, decreases the competitive incentives of the low-cost firm. In addition, it decreases the equilibrium royalty rate under patent licensing. Both effects contribute to the improvement of the production distribution in the duopoly market. Consequently, a partial acquisition occurring before patent licensing may be both profitable and welfare-improving.