International Journal of Business and Economics Volume 17, No. 2 September, 2018

Negative Royalty in Duopoly and Definition of License Fee: General Demand and Cost Functions

Masahiko Hattori

Faculty of Economics, Doshisha University, Japan

Yasuhito Tanaka

School of Social Sciences, Heriot-Watt University, Malaysia

Abstract

We extend the analysis about negative royalty in a duopoly with an outside innovator under linear demand and cost functions by Liao and Sen (2005) to a situation with general demand and cost functions. Moreover, we consider a case where an innovator has an option to enter the market and show that the optimal royalty rate for the innovator when it does not have an option to enter the market is smaller than that when it can enter the market. The sign of the optimal royalty rate depends on whether firms’ goods are strategic substitutes or strategic complements. We provide a concise example of welfare analysis, which suggests that the prohibition of entry of the innovator into the market may be an appropriate policy.

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