Fixed Fee Licenses and Welfare Reducing Innovation: A Note

This note shows that the fixed fee oligopolistic license model developed by Kamien and Tauman (1986) yields the result that the private returns from innovation can be greater than the social returns when the number of firms in the industry is equal to or larger than 3. This result implies that an innovation does not always improve welfare, even when it is profitable for the innovator. We also show that the auction license model yields the same result as the fixed fee.