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Does two-part tariff licensing agreement enhance both welfare and profit?

Mukherjee, Arijit; Tsai, Yingyi


Yingyi Tsai


It is general belief that firm profit is higher under two-part tariff licensing, while social welfare is greater under fixed-fee licensing. We show that this conclusion need not hold when technology transfer is costly and, in particular, when the quality of licensed technology is endogenously chosen. We demonstrate that both social welfare and firms profit are higher under two-part tariff licensing than they are under fixed-fee licensing. We also show that a higher quality of technology is licensed under the two-part tariff scheme than it is under the fixed-fee licensing contract. Our analysis suggests that both firms and society may prefer two-part tariff licensing contract under costly technology transfer. This study presents direct contrast result and contributes, therefore, to the extant literature wherein the transfer of technology is costless.

Journal Article Type Article
Publication Date 2015-09
Journal Journal of Economics
Print ISSN 0931-8658
Electronic ISSN 1617-7134
Publisher Springer
Peer Reviewed Peer Reviewed
Volume 116
Issue 1
Pages 63-76
APA6 Citation Mukherjee, A., & Tsai, Y. (2015). Does two-part tariff licensing agreement enhance both welfare and profit?. Journal of Economics, 116(1), 63-76. doi:10.1007/s00712-014-0421-5
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