The Effects of Downstream Competition on Upstream Innovation and Licensing
64 Pages Posted: 9 Mar 2014 Last revised: 26 Nov 2019
Date Written: November 25, 2019
We study how competition between two downstream firms affects an upstream innovator's innovation strategy, which includes selecting how much innovation to produce and whether to license this innovation to one (targeted licensing) or both (market-wide licensing) downstream competitors. Our model points to a U-shaped relationship between downstream competition and upstream innovation: at low levels of competition, market-wide licensing is optimal and competition reduces innovation, while at high levels of competition targeted licensing is optimal and competition increases innovation. Empirical analysis using a large panel of US data provides clear support for these predictions linking competition, innovation and licensing.
Keywords: Competition, Licensing, Innovation, Import Tariffs
JEL Classification: L22, L24, O31, O32
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