In industries where a patent system is in place, licensing agreements among competing firms often create distortions, as they involve royalties. Royalties are generally considered to be anti-competitive as they raise market prices and reduce consumer welfare. In this paper we propose simple tax...

We study how an incumbent patent holder can use its licensing policy strategically to reduce the threat of further entry. The patent holder can license its technology to another incumbent firm via a low royalty. This licensing strategy makes the terms of future licensing agreements less...