Abu Dhabi Global Market Square
P.O. Box 27522
United Arab Emirates
Institutional Affiliation: Gulf Capital
NBER Working Papers and Publications
|October 2018||The Effects of Downstream Competition on Upstream Innovation and Licensing|
with , , : w25166
We study how competition between two downstream firms affects an upstream innovator's innovation strategy, which includes selecting how much innovation to produce and whether to license this innovation to one (targeted licensing) or both (market-wide licensing) downstream competitors. Our model points to a U-shaped relationship between downstream competition and upstream innovation: at low levels of competition, market-wide licensing is optimal and competition reduces innovation, while at high levels of competition targeted licensing is optimal and competition increases innovation. Empirical analysis using a large panel of US data provides clear support for these predictions linking competition, innovation and licensing.