Discriminatory vs. uniform tariffs with international technology licensing

Abstract

This paper introduces technology licensing between rival firms into a three-country model to examine how an international technology licensing may upset the welfare ranking between a discriminatory tariff policy and a uniform tariff policy. It is found that a discriminatory tariff policy is inferior to a uniform tariff policy in terms of the social welfare of the importing country or the welfare of the world as a whole if the cost disadvantage of the licensor firm is high. This result is robust even if the licensor firm can engage in R&D investment in the long-run.

Keywords:

• Discriminatory tariffs
• uniform tariff
• international technology licensing
• welfare
• R&D

Acknowledgements

We would like to thank Toshihiro Matsumura, two anonymous referees and participants of the conference for very helpful comments. The usual disclaimer applies.

Notes

^* This paper was presented at the joint conference on industrial organization held by the University of Tokyo and National Taiwan University.

1. See Kamien, Oren, and Tauman (1992) and Saggi (2002) for detailed reviews.

2. This kind of ex-post-tariff setup can also be found in Horiba and Tsutsui (2000), Liao and Wong (2006) and Liao (2008), among others.

3. In the linear demand case, it is straightforward to derive that and , implying that the second-order and the stability conditions are all satisfied.

4. Hwang and Mai (1991) assume a general demand curve and constant marginal costs. They show that the importing country should impose a high (low) tariff on the firm with a low (high) marginal cost and the tariff difference is exactly 50% of the marginal cost difference.

5. Following the licensing literature (see, for example, Kamien and Tauman (1984), Wang (1998), Chang, Hwang, and Peng (2013) and Chang and Peng (2013), among others), we assume that the licensor firm can extract the entire benefit from licensing. Thus, the licensee firm is indifferent with and with no licensing, which implies the optimal fee is derivable as follows: .

6. Detailed derivations and proofs for the results derived in this section is available from the authors upon request.