PATENT LICENSING BY MEANS OF AN AUCTION: INTERNAL VERSUS EXTERNAL PATENTEE

An independent research laboratory owns a patented process innovation that can be licensed by means of an auction to two Cournot duopolists producing differentiated goods. For large innovations and close enough substitute goods the patentee auctions off only one licence, preventing the full diffusion of the innovation. For this range of parameters, however, if the laboratory merged with one of the firms in the industry, full technology diffusion would be implemented as the merged entity would always license the innovation to the rival firm. This explains that, in this context, a vertical merger is both profitable and welfare improving. Copyright � 2008 The Authors. Journal compilation � 2008 Blackwell Publishing Ltd and The University of Manchester.