Technology Transfer and its effect on Innovation

This paper analyses technology transfer and innovation activities by the high cost firm in a Cournot duopoly framework, where technology transfer between the firms may occur after the innovation decision. The two effects of innovation are to access the superior technology of the low cost firm if higher cost prohibits technology transfer and to affect the pricing rule of technology transfer via higher bargaining power. The incentive for innovation is more in fixed-fee licensing than in two-part tariff (royalty) licensing if cost difference between firms is low. The possibility of licensing, irrespective of the licensing scheme, encourages innovation if the cost difference between the firms is high.