On Monopolistic Licensing Strategies Under Asymmetric Information

Abstract

Consider a research lab that owns a patent on a new technology but cannot develop a marketable final product based on the new technology. There are two downstream firms that might successfully develop the new product. Each of these downstream firms could with a certain probability be successful in developing the new product, provided it gets a license from the monopolist. A downstream firm enjoys a private benefit if it is the sole supplier of the new product. However, if the monopolist sells licences to both firms, then both may successfully develop the new product, in which case they enjoy no benefits due to competition. If the downstream firms' benefits from being the sole supplier of the new product are private information, the research lab will sometimes sell two licences, even though under complete information it would have sold one exclusive licence. This is in contrast to the standard result that a monopolist will sometimes serve less, but never more buyers when there is private information.

Keywords: licensing, patents, R&D, asymmetric information, adverse selection

JEL Classification: L12, D45, D82