IP-for-IP or Cash-for-IP? R&D Competition and the Market for Technology∗

This paper argues that firms use ‘IP-for-IP ’ policies such as cross-licensing to strategically restrict transactions in the market for technology. The commitment to limit trade to reciprocal exchange (barter instead of cash transactions) enables firms to alter the allocation of R&D and soften R&D competition. In particular, it induces firms to focus R&D on their area of expertise. The costs of IP-for-IP are foregone gains from trade. Our analysis of the trade-offs involved shows that IP-for-IP is profitable in in-dustries where firms differ in their capabilities to commercialize IP. Patent complementarities and firm asymmetries further strengthen the optimality of IP-for-IP. JEL classification: O32, O31, L1