General licensing schemes for a cost-reducing innovation

Debapriya Sen*, Yair Tauman

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

204 Scopus citations


Optimal combinations of upfront fees and royalties are considered for a cost-reducing innovation in a Cournot oligopoly for both outside and incumbent innovators. It is shown that for any nondrastic innovation (a) the license is practically sold to all firms, ensuring full diffusion of the innovation, (b) consumers are better off, firms are worse off and the social welfare is improved, (c) the optimal licensing policy involves positive royalty for relatively significant innovations, (d) compared to an incumbent firm, an outsider invests more in R&D and has higher incentive to innovate and (e) as a function of the magnitude of the innovation, the industry size that provides the highest incentive to innovate is U-shaped.

Original languageEnglish
Pages (from-to)163-186
Number of pages24
JournalGames and Economic Behavior
Issue number1
StatePublished - Apr 2007


  • AR policy
  • Cost-reducing innovation
  • Incumbent innovator
  • Outside innovator


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