Market Size and Innovation: The Intermediary Role of Technology Licensing

44 Pages Posted: 1 Mar 2018

See all articles by Manuel Hermosilla

Manuel Hermosilla

Johns Hopkins University - Carey Business School

Yufei Wu

Cornerstone Research, Inc.

Date Written: January 2018


Previous literature finds that larger downstream markets fuel the innovation of new technologies by incentivizing firms to spend more on R&D. Our evidence shows that larger markets also increase the extent of licensing-based cooperation between upstream innovators and downstream commercializers. This cooperation is valuable because it pools firms' complementary capabilities. Thus, downstream market expansions could positively impact innovative outcomes even holding R&D expenditures constant. Evidence is drawn from the drug candidate licensing market, exploiting the quasi-experimental variation introduced by the enactment of the Medicare Part D program in 2003. A model for the determination of equilibrium commercialization strategies in Markets for Technology rationalizes our finding. In this framework, cooperation gains are proportional to market size but transaction costs are not. Thus, larger downstream markets foster cooperation by reducing the relative importance of the latter. To better match the empirical context, the model extends the canonical "one technology -- one application" framework of related work, to the more general case of "composite technologies," which may have more than one end-user application.

Keywords: Markets for Technology, Licensing, Natural Experiments, Drug Licensing, Pharmaceuticals, Medicare

JEL Classification: I1, L7, O3

Suggested Citation

Hermosilla, Manuel and Wu, Yufei, Market Size and Innovation: The Intermediary Role of Technology Licensing (January 2018). Available at SSRN: or

Manuel Hermosilla (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Yufei Wu

Cornerstone Research, Inc. ( email )

1000 El Camino Real
Menlo Park, CA 94025-4327
United States

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