Eco-technology licensing by a foreign innovator and privatization policy in a polluting mixed duopoly^*

* Accepted by Hong Hwang

Abstract

This article investigates the fixed-fee licensing contract in a mixed duopoly where public and private firms may purchase eco-technology from a foreign innovator. We show that the foreign innovator chooses either an exclusive or a non-exclusive licensing contract, depending on (i) the cost gap between the two firms, (ii) the environmental damage caused by pollutants, and (iii) whether a public firm is privatized or not. We further examine the welfare consequences of non-exclusive licensing, exclusive licensing and discriminatory fixed-fee licensing contracts, respectively, and show that privatization improves social welfare when both cost gap and environmental damage are large.

Keywords:

• Eco-technology
• fixed-fee licensing
• mixed market
• privatization
• non-exclusive licensing

Acknowledgements

We thank the two anonymous referees for their careful and constructive comments on an earlier version of this paper. All remaining errors are ours.

Notes

* Accepted by Hong Hwang

1. The importance of the eco-industry has been recognized by numerous reports of national and international institutions such as OECD (1996), Berg, Ferrier, and Paugh (1998), ERCL (2002), and Kennett and Steenblik (2005). The economic analysis of the eco-industry was introduced by Feess and Muehlheusser (2002) and David and Sinclair-Desgagne (2005). Later, Canton, Soubeyran, and Stahn (2008), Canton, David, and Sinclair-Desgagne (2012), Nimubona and Sinclair-Desgagne (2011), Lee and Park (2011) examined the effect of an emission tax on the activity of polluting firms toward the eco-industry.

2. Eco-innovators, maintaining its leadership position on eco-technology, include Clean Tech Delta, CLEAN, Eco World Styria (Austria), Ecotech Quebec (Canada), Green Cape, Lombardy Energy Cluster (Italy), SSCA (Sakishima Smart Community Alliance, Japan), Tenerrdis (France) and so on.

3. Earlier works initiated by Kamien and Tauman (1984, 1986) and Katz and Shapiro (1986). Kim and Lee (2014, 2016a) recently analyzed patent licensing by an external innovator.

4. Many works studied R&D activities as an endogenous variable in private or public R&D competitions (Matsumura and Matsushima 2004; Ishibashi and Matsumura 2006; Gil-Molto, Poyago-Theotoky, and Zikos 2011). Recent works consider eco-R&D investment to analyze eco-R&D activities under environmental regulation (Chiou and Hu 2001; Poyago-Theotoky 2007; McDonald and Payago-Theotoky 2014).

5. Earlier works suggest that regardless of the industry size and/or magnitude of the innovation, fixed-fee licensing is superior to royalty licensing under perfect competition (Kamien and Tauman 1984), homogenous oligopoly (Kamien and Tauman 1986; Katz and Shapiro 1986), leadership structure (Kabiraj 2004), and Cournot duopoly with network externality (Wang, Liang, and Lin 2012). Tsai and Mukherjee (2017) examined a foreign technology licensing and showed that fixed fee is an equilibrium licensing when the domestic licensee is cost competitive. Further, recent research also analyzed two-part tariff, which consists of a fixed fee plus a royalty (Erutku and Richelle 2007; Sen and Tauman 2007; Fauli-Oller, Gonzalez, and Sandonis 2012; Chang, Lin, and Tsai 2016). Kim and Lee (2016b) showed that the optimal royalty is zero in a two-part tariff, which is a fixed-fee licensing, when the innovator’s production cost is zero or sufficiently small.

6. If c₀ ≤ d, public monopoly is the equilibrium outcome, and if private monopoly is the equilibrium outcome. Both are trivial and unimportant cases and thus, we eliminate these cases.

7. Although we incorporate non-zero pollution eco-technology in the model, the qualitative implications of the analysis are not directly relevant with regard to this form of abatement technology.

8. Due to the zero-operating profit, the public firm will get a negative profit when it is a unique licensee. Then, the government can provide a financial subsidy for a licensing if there is no welfare loss.

9. This result comes from the two assumptions that (i) the public firm has constant marginal cost and (ii) the environmental tax equals to the constant marginal damage. These two assumptions provide the simplest analysis. When we use the complicated model, the qualitative implications of the analysis will be still valid but calculations will be messy.

10. From lemmas 4 and 5, we can derive c_N ≥ c_E where and .

11. A discriminatory contract is available only when the foreign innovator has complete information on the types and profits of the polluting firms and the ability to segment the firms. Note that without exclusion, the profit under discriminatory pricing will always not be lesser than the profit under uniform pricing. However, due to the effect of exclusive licensing strategy, the profit of non-discriminatory contract under exclusive licensing can be higher than that of discriminatory contract under non-exclusive licensing.