Free Licensing in a Differentiated Duopoly

The present paper discusses the possibility of free licensing in a model of differentiated duopoly. We have shown that given the market size, the degree of product differentiation and the unit cost of input production, free licensing will occur if the transferred technology is not much superior and the market price of input is sufficiently large. If, however, any of market size, input cost or product substitution goes up, the possibility of free licensing will fall. Our result has an important implication in the context of transboundary pollution. The overall welfare under free licensing will be higher unambiguously