Enhancing Vertical Efficiency Through Horizontal Licensing

Posted: 9 Nov 2009

See all articles by Anil Arya

Anil Arya

Ohio State University (OSU) - Fisher College of Business

Brian Mittendorf

Ohio State University (OSU) - Fisher College of Business

Date Written: 2006

Abstract

Attempts to improve our understanding of the impact ofoutsourcing on the decision to license. Various models of the licensingdecision are presented, and several propositions are extrapolated from themodels. Analysis of the models provides an explanation for the prevalence ofpatent licenses issued to potential competitors--i.e., a firm wishing toprocure better pricing from a supplier may choose to license its coretechnology to a competitor. Licensing removes the firm's monopoly position, but the inclusion of royaltyfees also means the competitor is more sensitive to supplier pricing than thefirm. As a result, the supplier is compelled to lower prices for thecompetitor's sake, and the patent holder enjoys the benefit of lower prices aswell by imposing a license fee. In this way, the perks enjoyed by firms thatrely on outsourced inputs are enjoyed by other marketplace players, includingthe licensee, the supplier, and the consumer. (SAA)

Keywords: Outsourcing, Licensing strategies, Suppliers, Market competition, Patent licenses, Royalties, Technology transfer

Suggested Citation

Arya, Anil and Mittendorf, Brian, Enhancing Vertical Efficiency Through Horizontal Licensing (2006). Journal of Regulatory Economics, Vol. 29, Issue 2, p. 333-342 2006. Available at SSRN: https://ssrn.com/abstract=1502534

Anil Arya

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Brian Mittendorf

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

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