Licensing and R&D Investment of Duopolistic Firms with Partially Complementary Technologies

We consider research and development (R&D) investment competition between duopolistic firms that independently invest in two complementary technologies to produce their products. By "partially complementary technologies", we mean that each firm can produce the goods without both technologies but they incur more redundant costs than with both technologies. We derive the investment competition equilibria in R&D of the two technologies with and without a licensing system. By comparing R&D investment levels in the two equilibria, we show that the licensing system discourages R&D investment in most cases; however, it encourages R&D investment in some cases when the duopolistic firms can produce the goods using both technologies. We also show that (cross-) licensing increases the expected social surplus at the symmetric equilibrium.