PATENT LICENSING BY A STANDARD AUCTION IN THE PRESENCE OF NETWORK EXTERNALITY

In this paper we develop a model of licensing a new product technology of a network good. The new technology improves the quality of the network good and is protected by a patent. In such a context we find that a standard auction mechanism can efficiently allot the new technology under both complete and incomplete information. We consider two possible downstream market structures-one where the firms simultaneously choose prices and the other where they sequentially choose prices. We find that the equilibrium bids and expected auction revenue are more when the firms move simultaneously in the posterior price game. We also find that the equilibrium bids and expected auction revenue decrease as the network effect becomes stronger. Copyright Blackwell Publishing Ltd and The University of Manchester, 2005.