R&D competition, licensing, and intellectual property rights

Abstract

This thesis consists of three parts. The first part analyses R&D competition among firms with incomplete information. Both one-sided and two-sided informational problems are studied. For the one-sided private information model, we analyse a two-stage stochastic R&D game where the first mover possesses private information regarding its R&D progress. The rival can only observe its R&D investments, but not the actual R&D position. R&D investment thus carries both investment and signalling effects. Both complete information and signalling equilibria are possible in the second period. For some parameter ranges, the equilibrium regime is endogenous and depends on the firm’s position. For some parameter ranges, the possibility of the signalling equilibrium induces under-investment in the first period, which is contrary to the conclusion of the entry deterrence literature. For the two-sided information model, both firms possess private information regarding their R&D progress. They infer the rival’s R&D position from its R&D investment. Most results from the one-sided information model carries through. The second mover can manipulate the first mover’s belief about its position in the second period by adjusting the first period investment. The game is in the signalling regime if the difference between monopoly and duopoly profit is sufficiently large and if the possibility of leapfrogging is high. For some parameter ranges, the choice of the information regime is endogenous. Due to the more complicated setting, most analysis for the first period is carried out by numerical simulations. Part two of the thesis uses a strategic licensing framework to study firms’ licensing behaviour when there are two generations of technology in the market. The innovations are sequential with the second invention built on the first one. We analyse two different licensing schemes: fixed fee payment and royalty payment. The results indicate that the optimal licensing strategy depends on the market size and magnitudes of the two innovations. When two inventors use the same licensing scheme, for most parameter ranges, royalty payment scheme out-performs fixed fee payment scheme for inventor one if the second technology is significant. When inventors can choose different licensing schemes endogenously, for some parameter ranges, the early inventor prefers licensing by royalty and the second generation inventor prefers licensing by a fixed fee. Contrary to the standard literature with outside innovators, royalty can be supported as the best licensing scheme. Part three of this thesis studies the implication of the degree of intellectual property right (IPR) protection granted to the basic research when this intermediate research is essential to the final discovery but does not carry any stand-alone consumer value. We present a patent race model consisting of two complementary stages. Our results indicate that in some industries, it may be beneficial for the technology follower country to strengthen its IPR protection. On the other hand, for some parameter values, the technology leading country may benefit by lowering its IPR protection level. The level of IPR protection offered to the basic technology can be used as an instrument to soften R&D competition in the second stage game. Furthermore, for symmetric countries, asymmetric levels of IPR protection may be chosen in equilibrium. It is not necessarily welfare enhancing to harmonise the protection levels.