Licensing with free entry : conference paper

The literature on the licensing of an innovation has mainly focused on some specific contract types. We show within the framework of a fairly general model that removing these contractual limitations will lead to extreme market outcomes. Specifically, we find that when the patentee can employ observable contracts that can condition on market entry, it can achieve the monopoly outcome. Furthermore, when the patentee can only use unconditional quantity forcing contracts, it captures the entire market, albeit not at monopoly price, via a single licensee. Our results point out to the significance, and perhaps the particularity, of observable, nonrenegotiable contracts.