Technology licensing and Collusion

This paper considers the possibility of technology licensing and tacit collusion between firms that produce homogeneous goods under asymmetric cost structures and compete in quantities. We discuss the possibility of collusion under Grim-Trigger strategies when technology may be licensed via fixed fee or royalty or two-part tariff. Irrespective of the type of licensing contract, the possibility that a stable cartel is formed is the same. In the no-licensing stage, the cartel formation is more likely if the cost difference between the firms is higher. In contrast to Lin (1996), all forms of licensing facilitate (obstruct) collusion, if the initial cost difference between the firms is less (more). Technology will always be licensed in the first stage and the optimal form of licensing is either fixed-fee or royalty or two-part tariff. The cartel will be formed if the firms are relatively patient and welfare either increases or decreases in the post-licensing stage.