Keele Economics Research Papers

Transcription

1 KERP 00/0 Innovaton Lensng and Welfare Art Mukheree Keele Eonoms Researh Paers Keele February 00

2 KERP Keele Eonoms Researh Paers The Keele Eonoms Deartment rodues ths seres of researh aers n order to stmulate dsusson and nvte feedbak. Coyrght remans wth the authors. All aers n the ker seres are avalable for downloadng from the Keele Eonoms webste va ssn Deartment of Eonoms Keele Unversty Keele Staffordshre st5 5bg uk tel: fa: emal: eonoms@keele.a.uk

3 Keele Eonoms Researh Paers ker 00/0 Innovaton Lensng and Welfare by Art Mukheree Keele Unversty Date Frst verson: February 00. Revsed verson: August 00. Abstrat Keywords J.E.L. Class Notes Ths aer eamnes how the oton for lensng affets researh and develoment R&D and soal welfare. We fnd that f ost reduton from R&D s suffently small and there s an oton of lensng frms wll do non-ooeratve R&D. In absene of lensng frms wll do ooeratve R&D for suffently small ost reduton from R&D. Whether the oton for lensng nreases soal welfare s ambguous. If the ossblty of lensng nreases robablty of suess n R&D sgnfantly then welfare s hgher n resene of lensng. Cooeratve R&D Lensng Welfare D4 L1 O4 I would lke to thank Jong-Hee Hahn Tarun Kabra for helful suggestons. The usual dslamer ales. Address Download Deartment of Eonoms Keele Staffordshre st5 5bg Unted Kngdom emal a.mukheree@eon.keele.a.uk

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5 1 Introduton Two mortant ways of mrovng the tehnologal level of an eonomy are researh and develoment R&D and tehnology lensng. As tehnology lensng s usually less eensve way of mrovng tehnologal qualty omared to ndgenous R&D many ountres are enouragng ther frms to engage n tehnology lensng and mrovng ther tehnologal qualty. However t has been found that n ase of roess nnovaton 1 tehnology lensng may redue soal welfare. Kabra and Mart 199 and Ln 1996 have argued that lensng an redue welfare f ost reduton of a frm ndues some frms to et the market or f lensng faltates olluson. Therefore tehnology lensng an redue soal welfare by nreasng market onentraton. In ths aer we rovde another reason for lower soal welfare under tehnology lensng. More sefally we argue that the ossblty of lensng may redue soal welfare by dsouragng frm to do ooeratve R&D. Thus we show that the resene of tehnology lensng an redue soal welfare even f lensng does not ndue et of frms or does not faltate olluson but hanges R&D organzaton. Researhers have already ad large amount of attenton to dsuss several ssues on R&D. One mortant area of researh s to elan the ratonale for dong ooeratve R&D and ts effet on R&D nvestment and soal welfare see e.g. d Asremont and Jaquemn 1988 Suzumura 199 Cho 199 and Hnlooen However revous works on R&D generally gnored the ossblty of other busness strateges suh as tehnology lensng. Prevous aers assumed that a frm ould share ts knowledge wth another frm f they do R&D together but dd not allow a frm to sell ts knowledge to another frm. Ths assumton s reasonable n those ndustres where tehnology lensng s very dffult or ostly. Hene the assumton of the revous aers mght be sutable n ndustres wth tat knowledge but mght not be relevant where knowledge sharng s not dffult. We show that f we allow frms to nrease ther strateg otons by makng lensng as a feasble oton along wth ooeratve and non-ooeratve R&D then the nentve for knowledge sharng through ooeratve R&D would be redued. We fnd that frms would refer to do non-ooeratve R&D keeng the oton for lensng oen. Whether the ossblty of lensng nreases soal welfare s however ambguous. Thus the resent aer s a ste to eamne the mat of lensng on R&D organzaton and soal welfare. 1 In ase of roess nnovaton better qualty of the tehnology mles lower ost of roduton for the orresondng frm. For aers on atent rae one may refer to Loury 1979 and Lee and Wlde Two eetons are Galln and Wnter 1985 and Katz and Sharo In totally dfferent ontet these aers fous on the effet of lensng on R&D. Whle Galln and Wnter 1985 dentfy the ondtons for lensng n a searh-theoret model of R&D Katz and Sharo 1985 fous on the nentves to develo a roess when atent holder has the oton for lensng ts tehnology to the omettor. 1

6 Hene ths aer serves two uroses. Frstly t shows the effet of lensng on R&D. Seondly t shows that lensng may redue welfare when the frms have the oton for R&D before lensng. In what follows seton onsders a model of R&D ometton between Cournot duoolsts wth homogeneous goods where suess n R&D s unertan. We eamne R&D organzaton and soal welfare wth and wthout the oton for lensng. We show that n absene of lensng frms wll do ooeratve R&D when ost reduton from R&D s suffently low. Whle ooeraton n R&D stage wll nrease the robablty of usng a better tehnology by both frms knowledge sharng through R&D ooeraton wll also nrease ometton n the rodut market. If ost reduton from R&D s suffently small then the former effet wll domnate the latter effet and wll make ooeratve R&D roftable omared to non-ooeratve R&D. However the ossblty of unlateral suess n R&D an reate the ossblty of tehnology lensng. In ths stuaton the suessful frm wll always refer to lense ts tehnology aganst re-unt outut royalty. Thus lensng wll hel the lenser to rase ts roft from royalty nome and also to redue ometton from the lensee as otmal outut royalty wll not hange the effetve margnal ost of roduton of the lensee omared to a stuaton wth no lensng. The ossblty of lensng wll always enourage the frms to do non-ooeratve R&D keeng the oton for lensng oen. If ost reduton from R&D s suffently large then frms wll do nonooeratve R&D rresetve of the avalablty of lensng. In ase of unlateral suess n R&D lensng does not hange the effetve margnal ost of roduton of the unsuessful frm omared to a stuaton wth no lensng. But lensng nreases roft of the suessful frm through royalty nome. Hene resene of lensng nreases soal welfare when ost reduton from R&D s suffently large. If ost reduton from R&D s suffently small and lensng s an oton then frms wll do non-ooeratve R&D. Frms wll do ooeratve R&D wthout the ossblty of lensng. Sne lensng does not hange the effetve margnal ost of the lensee omared to a stuaton wth no lensng lensng does not affet onsumer surlus. But n absene of lensng ooeratve R&D wll hel to redue the margnal ost of roduton of the unsuessful frm under unlateral suess n R&D. Therefore n ase of unlateral suess n R&D ooeratve R&D wll nrease onsumer surlus omared to non-ooeratve R&D and lensng afterwards. Hene resene of lensng redues soal welfare when ost reduton from R&D s suffently small. However as we wll show f ossblty of lensng nreases robablty of suess n R&D sgnfantly then even f ost reduton from R&D s suffently small soal welfare an be hgher n resene of lensng. Thus we show that the effet of lensng on soal welfare deends on the degree of ost reduton from R&D and the effet of R&D nvestment on robablty of suess n R&D.

7 At ths ont t s worth mentonng a related result of the lterature on lensng. Prevous works on lensng argue that frms would refer lensng wth outut royalty than fed fee lensng see e.g. Galln and Wnter 1985 and Rokett In the followng analyss we wll show that the ooeratve R&D of ths aer s smlar to a lensng ontrat wth fed fee only. Hene f lensng s not a feasble oton then ooeratve R&D hels the frms to relate a stuaton smlar to a lensng ontrat wth fed fee. But ooeratve R&D does not hel the frms to relate a lensng ontrat wth outut royalty. Thus f lensng s not allowed then t redues the oton to the frms and nreases soal welfare. The rest of the aer s organzed as follows. The net seton rovdes a model wth non-ooeratve and ooeratve R&D wthout the ossblty of lensng. We etend ths model n seton by nororatng lensng. Seton 4 looks at the welfare mlatons. In seton 5 we dsuss the mlatons of endogenous R&D osts on soal welfare. Seton 6 onludes the aer. The bas model Consder an eonomy wth two frms alled frm 1 and frm. Assume that these frms an rodue a homogeneous rodut wth a tehnology orresondng to onstant margnal ost of roduton. Both frms do R&D and eah of them an redue the ost of roduton to. However suess n R&D s unertan. Assume that and 1 show the resetve unondtonal robablty of suess and falure n R&D. We assume that both frms fae same robablty of suess n R&D. Further we assume that there are no other osts related to roduton or R&D. The assumton of no osts of dong R&D wll mles that both frms always fnd t roftable to do R&D omared to non-r&d. If there were osts of dong R&D frms mght not fnd t roftable to do R&D when the robablty of suess n R&D was suffently low. Sne our urose s to eamne the mat of lensng on R&D organzaton.e. non-ooeratve and ooeratve R&D and soal welfare we abstrat the ossblty of non-r&d by assumng no ost of dong R&D. Fnally assume that the nverse market demand funton s gven by P = a q 1 where P shows the re of the rodut q stands for the ndustry outut and a >. Further throughout the analyss we assume that > a. Ths assumton mles that f one frm has a tehnology orresondng to margnal ost of roduton and another frm has a tehnology orresondng to margnal ost of roduton the outut of the both frms wll be ostve. In ths seton we wll assume that these frms do not have the oton for lensng. Therefore here we onsder the followng game. In stage 1 these frms dede

8 whether to do non-ooeratve R&D or ooeratve R&D. Then n stage they omete lke Cournot duoolsts n the rodut market. We solve the game through bakward nduton. Let us frst onsder non-ooeratve R&D. Proft of the th frm from R&D s V NC = where =1 and the frst seond argument n the funton reresents the margnal ost of roduton of frm 1 frm. Now we eamne the ossblty of ooeratve R&D by these frms. Followng Cho 199 we assume that under ooeratve R&D both frms oerate ther own R&D lab but these frms wll use the nnovated tehnology f at least one of them sueeds n R&D. 4 Therefore n ase of ooeratve R&D roft of the th frm =1 s V C = However these frms wll refer to do ooeratve R&D omared to nonooeratve R&D rovded nether of them s worse-off under ooeratve R&D omared to non-ooeratve R&D. So these frms wll do ooeratve R&D nstead of non-ooeratve R&D rovded V C > V NC or > +. 4 Condton 4 shows that f ndustry roft n ase of unlateral suess n R&D nreases under ooeratve R&D omared to non-ooeratve R&D then frms wll refer ooeratve R&D omared to non-ooeratve R&D. Sne ndustry roft remans same n ase of both-suess and no-suess n R&D the determnant for ooeratve or non-ooeratve R&D beomes the ndustry roft under unlateral suess n R&D. Hene f ondton 4 does not hold then frms wll refer to do non-ooeratve R&D omared to ooeratve R&D. Wth the demand and ost sefaton we fnd that 4 holds f and only f 5 a >. 5 Therefore followng rooston s mmedate from the above dsusson. 4 Gven our assumtons on R&D t s always otmal for the frms to oerate two researh labs under ooeratve R&D. 4

9 Prooston 1: Frms wll refer to do ooeratve R&D omared to non-ooeratve 5a R&D when ost reduton from R&D s not suffently large.e. >. Sne the hoe of R&D organzaton deends on the amount of ost reduton from R&D t s easy to understand that soal welfare wll also be affeted wth the amount of ost reduton. Eeted welfare s gven by 5 a EW C = W0 + 1 W0 + 1 W0 for > 6 and 5 a EW NC = W0 + 1 W0 + 1 W0 for < 7 where the argument n W 0.. shows the number of frms rodung wth ost and wth ost and W 0.. shows the summaton of ndustry roft and onsumer surlus for the orresondng stuaton. Lensng In ths seton we etend the model of the revous seton by allowng the frms to take deson on lensng e-ost R&D. We onsder the followng game. In stage 1 frms dede whether to do non-ooeratve R&D or ooeratve R&D. In stage they dede on tehnology lensng. In stage they omete lke Cournot duoolsts. We solve the game through bakward nduton. It s lear from our framework that lensng s not an oton f frms do ooeratve R&D sne f suessful they share the nformaton about the new nnovaton whle dong R&D. However gven non-ooeratve R&D the frms may have nentve for knowledge sharng e-ost R&D rovded there s unlateral suess n R&D. We assume that f the frms do non-ooeratve R&D then n ase of unlateral suess n R&D the suessful frm has the oton to gve a take-t-or-leave-t lensng offer to the unsuessful frm. Under lensng the lenser an harge nonnegatve u-front fed-fee F and er-unt outut royalty r. 5 Before eamnng these frms referene over ooeratve R&D and nonooeratve R&D wth the oton for lensng afterwards let us frst eamne the otmal lensng ontrat and ayoffs of these frms. Sne these frms are symmetr wthout loss of generalty we assume that n ase of unlateral suess n R&D frm 1 5 One may thnk that the frms an make a smlar ontrat under ooeratve R&D where the ontrat s ontngent uon the R&D outome sayng that n ase of unlateral suess n R&D the suessful frm wll gve the tehnology to the unsuessful frm but aganst a ayment onsstng of fed fee and outut royalty. However f the ossblty of oordnaton n the R&D stage under ooeratve R&D hels the unsuessful frm to aqure the knowledge about the new nnovaton then ths ontngent ontrat under ooeratve R&D beomes neffetve. 5

10 sueeds n R&D and dedes whether to lense the tehnology to frm or not. Therefore n ths stuaton frm 1 mamzes the followng eresson: Ma F + rq r 8 F r s.t. F + rq r r F 10 and F 0 q 0 = Soluton of the roblem gven by 8 11 wll rovde the followng result. Prooston : If the frms do not make a ooeratve ontrat e-ante R&D then n ase of unlateral suess n R&D the suessful frm wll always lense ts tehnology to the unsuessful frm. The lensng ontrat wll nvolve only outut royalty equal to. Sne the roof s smlar to Mukheree and balasubramanan 001 we are leavng the detals here. Now we are n a oston to onsder the otmalty between ooeratve R&D and non-ooeratve R&D wth the oton for lensng afterwards. We should note that 5a f < then these frms wll not do ooeratve R&D but wll do non-ooeratve R&D followed by lensng n ase of unlateral suess n R&D. Hene n ths stuaton t s trval that frms wll always refer non-ooeratve R&D wth the ossblty of lensng afterwards omared to ooeratve R&D. 5a But for > frms wll refer both ooeratve R&D and nonooeratve R&D wth the ossblty of lensng afterwards omared to non- ooeratve regme. Sne rofts of these frms under both-suess and no-suess reman same under ooeratve R&D and non-ooeratve R&D wth the ossblty of lensng referene between ooeratve agreement e-ante R&D and nonooeratve R&D wth the oton for lensng deends on the rofts of these frms n ase of unlateral suess n R&D. The th frm wll refer non-ooeratve R&D wth the oton for lensng omared to ooeratve R&D rovded * 1 + rq + > 1 * or + rq + > 1 where =1 and q * shows the otmal outut of the th frm under lensng. Demand and ost sefatons show that the ondton 1 satsfes always. 6 Anttrust law may be resonsble for non-negatve onstrant on lensng ontrat. 6

11 We summarze the above dsusson n the followng rooston. Prooston : These frms always refer non-ooeratve R&D wth the oton for lensng afterwards omared to ooeratve R&D. The reason for the above result s easy to understand. If frms do ooeratve R&D then n ase of unlateral suess n R&D the suessful frm needs to share the knowledge wth the unsuessful frm and the suessful frm faes relatvely hgher ometton from the unsuessful frm omared to a stuaton where the suessful frm does not share the knowledge wth the unsuessful frm. But f frms do nonooeratve R&D and have the oton for lensng afterwards then n ase of unlateral suess n R&D the suessful frm wll always gan from lensng ts tehnology to the unsuessful frm. Here the suessful frm an elmnate the ossblty of hgher ometton from the unsuessful frm by desgnng a sutable lensng ontrat. Sne these frms are symmetr and have smlar robablty of beng a lenser or lensee both frms wll always do non-ooeratve R&D nstead of formng a ooeratve R&D agreement when there s a ossblty of lense e-ost R&D. One should take the result of Prooston wth a auton. In ths aer ooeratve R&D only hels the frms to beneft from knowledge sharng. We have eamned relatve roftablty of knowledge sharng at the tme of dong R&D omared to knowledge sharng after gettng the nnovaton. But n our framework there s no beneft from ost savng or synerges under ooeratve R&D. If R&D nvolves fed ost roduton as n Mart 1991 then ost savng rovdes other nentve for dong ooeratve R&D. As a result frms may refer to do R&D n one lab nstead of oeratng two labs as desrbed n ths aer. 7 The ossblty of gettng beneft from synerges as n Kabra and Mukheree 000 also rovdes another nentve for dong ooeratve R&D. Wth suffently hgher nentve for gettng benefts from ost savng or synerges under ooeratve R&D frms mght do ooeratve R&D for some arametr onfguratons even f they have the oton for lensng e-ost R&D. However even n ths stuaton our bas argument holds.e. the ossblty of lensng e-ost R&D redues the nentve for dong R&D. Sne the ossblty of knowledge sharng under lensng hels the frms to nrease ther rofts under non-ooeratve R&D frms have lower nentve to do ooeratve R&D n resene of lensng e-ost R&D. 7 If the frms oerate a sngle lab under ooeratve R&D then the ayoff of the th frm = 1 wll be + K 1 where K s the fed ost of dong R&D. Hene the frms would use a sngle lab nstead of two labs under ooeratve R&D rovded > 1 [ ]. K 7

12 Further t should be noted that we onsder a stuaton where frms would make the lensng ontrat e-ost R&D. However these frms an make the same lensng ontrat e-ante R&D ontngent on the R&D outome. 8 For eamle these frms an do non-ooeratve R&D and make a lensng ontrat e-ante R&D sayng that f there s any tehnology transfer e-ost R&D then the lensee wll ay an outut * royalty at a rate r =. But whether the frms do the lensng agreement e-ante or e-ost R&D t s lear that the frms would not do ooeratve R&D when they have the oton for knowledge sharng through tehnology lensng. It s also worth mentonng the smlarty of the ooeratve R&D mentoned n ths aer and a lensng ontrat wth fed fee only. If the frms make a lensng ontrat wth u-front fed fee only then both frms wll rodue wth a margnal ost of roduton. Further the symmetry of these frms makes them equally lkely to be a lenser and a lensee. Therefore f the frms make a lensng ontrat wth an ufront fed fee only then the eeted ayoff of the th frm wll be V LF = F * + 1 F * * where F s the otmal value of the fed fee harged by the lenser. The eresson 1 s same as the eresson. Ths mles that under ooeratve R&D agreement frms an relate the lensng ontrat wth fed fee but ooeratve R&D does not hel the frms to relate the lensng ontrat wth outut royalty. In ase of unlateral suess n R&D the effetve margnal ost of roduton of the unsuessful frm s same under non-ooeratve R&D wth and wthout the ossblty of lensng. Ths s beause the effetve margnal ost of roduton of the unsuessful frm wll be the summaton of and the er-unt outut royalty. Therefore n ase of unlateral suess n R&D otmal outut and roft of the unsuessful frm wll be same under non-ooeratve R&D wth and wthout lensng. Therefore eeted welfare under non-ooeratve R&D wth the ossblty of lensng afterwards wll be EW NCL = W + 1 Wl + 1 W where W l shows the summaton of onsumer surlus and ndustry roft. It should be noted that now ndustry roft nludes royalty ayment also. We have seen that otmal outut and roft of the unsuessful frm wll be same under non-ooeratve R&D wth and wthout lensng. Therefore otmal outut and roft eludng royalty nome of the suessful frm wll be same under non-ooeratve R&D wth and 8 In a aer Sothmer 1996 showed the beneft from e-ante lensng ontrat when seond generaton rodut nfrnges atent of the frst generaton rodut. 8

13 wthout lensng. Hene we fnd that W l = W0 + quns where q uns shows the otmal outut of the unsuessful frm n ase of unlateral suess n R&D under nonooeratve R&D. 4 Welfare omarson Now we are n a oston to omare soal welfare under two regmes: one where frms do not have the oton for lensng e-ost R&D and seond where the frms have the oton for lensng e-ost R&D. 5a Let us frst onsder the stuaton where >. In ths stuaton frms do ooeratve R&D when they do not have the oton for lensng e-ost R&D. In resene of lensng these frms wll do non-ooeratve R&D. Therefore orresondng welfare eressons are 6 and 14. Gven the demand and ost sefatons omarson of 6 and 14 shows that 6 s always greater than 14. 5a Hene soal welfare s hgher n absene of lensng when >. 5a Net onsder the stuaton where <. Here frms wll do nonooeratve R&D rresetve of the oton for lensng e-ost R&D. Therefore here the orresondng eressons for welfare are 7 and 14. It s easy to understand that n ths stuaton welfare s hgher n resene of lensng. Ths s beause the ossblty of lensng does not hange the otmal outut desons of these frms but n ase of unlateral suess n R&D lensng hels the suessful frm to nrease ts roft from royalty nome. We summarze the above dsusson n the followng rooston. 5a Prooston 4: Consder > <. Then the ossblty of lensng e-ost R&D redues nreases soal welfare omared to a stuaton where the frms do not have the oton for lensng e-ost R&D. 5 Endogenous R&D osts So far we have assumed that robablty of suess n R&D s gven eogenously. In ths seton we wll brefly dsuss the stuaton where frms an nfluene the robablty of suess through ther hoe of R&D nvestment as n Cho 199. We wll show that when frms an nfluene the robablty of suess n R&D then welfare an be hgher n resene of lensng even for the stuatons where ooeratve R&D s roftable than non-ooeratve R&D n absene of lensng. Assume that the unondtonal robablty of suess n R&D nreases wth R&D nvestment.e. =1 where s frm s R&D nvestment. We onsder that > 0 < 0 0 = and = 0 for =1. Therefore 9

14 10 eeted rofts of the th frm under non-ooeratve R&D wthout lensng ooeratve R&D and non-ooeratve R&D wth lensng are resetvely 1 1 NC V + + = C V + + = and 1 * rq NCL V + + = where = 1 and. Resetve frst order ondtons for roft mamzaton wth reset to R&D nvest are = = 19 and 1 * rq =. 0 It s easy to see that n absene of lensng ooeratve R&D wll be roftable omared to non-ooeratve R&D f 5 a >. If 5 a = then otmal R&D nvestments under ooeratve and non-ooeratve R&D are same and hene eeted wll be same under non-ooeratve and ooeratve R&D. Gven any ostve and equal R&D nvestments of these frms ooeratve R&D wll gve hgher eeted roft omared to non-ooeratve R&D f 5 a >. Further f 5 a > then otmal R&D nvestment of eah frm wll be more under ooeratve R&D omared to nonooeratve R&D. Hene eeted roft of these frms under ooeratve R&D wll be hgher than that of under non-ooeratve R&D when 5 a >. Smlar argument wll show that frms wll not do ooeratve R&D for 5 a <.

15 Gven the values of R&D nvestments left hand sde of 0 s greater than the left hand sdes of 18 and 19. Due to the symmetry of these frms both frms wll nvest more under non-ooeratve R&D wth lensng omared to ooeratve R&D and non-ooeratve R&D wthout lensng. Therefore equlbrum R&D nvestments and robablty of suess n R&D wll be hghest under non-ooeratve R&D wth the ossblty of lensng omared to ooeratve R&D and non-ooeratve R&D wthout the ossblty of lensng. Followng the dsussons of the revous seton we an say that gven the ostve R&D nvestments of these frms eeted welfare would be lower under nonooeratve R&D wth the ossblty of lensng omared to ooeratve R&D. However we have shown that equlbrum R&D nvestment and robablty of suess n R&D wll be hgher under non-ooeratve R&D wth the ossblty of lensng omared to ooeratve R&D. If beneft from hgher robablty of suess s suffently hgher then soal welfare wll be hgher under non-ooeratve R&D wth the ossblty of lensng omared to ooeratve R&D. Now we wll onsder a sef funtonal form for the robablty of suess n R&D to rovde an eamle showng hgher welfare under non-ooeratve R&D wth the ossblty of lensng omared to ooeratve R&D when we have endogenous osts of R&D. Suose the robablty funton for the suess n R&D faed by eah of 1 theses frms s gven by = µ = 1. Further for smlty assume that a = 1 = 0 and Gven the demand and ost sefatons we fnd that robablty of suess n R&D under non-ooeratve R&D wth the ossblty of lensng equals to 1 for µ. Assume that µ =. For ths value of µ 1 1 otmal total R&D nvestment n the eonomy under non-ooeratve R&D wth 41 lensng s. Therefore eeted welfare under non-ooeratve R&D wth 9 lensng s 41 1 W l =. 1 9 When µ = the robablty of suess and otmal total R&D nvestment n the and. Therefore eonomy under ooeratve R&D are resetvely eeted welfare under ooeratve R&D s [ ] W = Gven these values of a and ooeratve R&D s roftable for

16 From 1 and we fnd that W l > W sne 0. So the above dsussons mly that the ossblty of endogenous R&D osts would modfy Prooston 4 n the followng way. Prooston 5: Possblty of lensng s more lkely to redue soal welfare f the ost reduton from R&D s suffently small and the effet of R&D nvestment on the robablty of suess n R&D s suffently low. > 6 Conluson In ths aer we eamne whether the oton for lensng s soal welfare mrovng. We show that when lensng e-ost R&D s an oton then the frms wll always do non-ooeratve R&D keeng the oton for lensng oen. But when lensng s not an oton then the frms wll do ooeratve R&D when ost reduton from R&D s suffently small. Therefore f ost reduton from R&D s suffently small then frms wll do non-ooeratve R&D when they have the oton for lensng afterwards but wll do ooeratve R&D when they do not have the ossblty of lensng. Lensng wll not hange the effetve margnal ost of roduton of the lensee omared to no lensng. We show that n ths stuaton onsumer surlus and also soal welfare wll be more under ooeratve R&D omared to non-ooeratve R&D wth the ossblty of lensng afterwards. Hene f ost reduton from R&D s suffently small then the oton for lensng s welfare redung. If ost reduton from R&D s not suffently small then the frms wll do nonooeratve R&D rresetve of the ossblty of lensng. Here effetve osts of roduton reman same wth and wthout the ossblty of lensng. But the ossblty of royalty ayment nreases eeted roft of the frms when there s a ossblty of lensng. Thus n ths stuaton the oton for lensng nreases welfare. If the frms an nfluene robablty of suess n R&D through ther hoe of R&D nvestment then the ossblty of hgher soal welfare nreases n resene of lensng. Ths s beause the eeted roft wth the resene of lensng ndues the frms to nvest more n R&D whh nreases the robablty of suess n R&D. Therefore whether resene of lensng nreases welfare deends on the ost reduton from R&D and the nfluene of R&D nvestment on the robablty of suess n R&D. Thus unlke revous studes ths aer shows that the ossblty of lensng an redue welfare even f lensng does not ndue frms to et the market or does not faltate olluson. Hene whle enouragng lensng an eonomy should be areful to onsder ts effet on other strateges of the frms suh as R&D organzaton. 1

17 Referenes 1. Cho J. P. 199 Cooeratve R&D wth rodut market ometton Internatonal Journal of Industral Organzaton 11: d Asremont C. and A. Jaquemn 1988 Cooeratve and non-ooeratve R&D n duooly wth sllovers The Ameran Eonom Revew 78: Galln N T. and R. A. Wnter 1985 Lensng n the theory of nnovaton RAND Journal of Eonoms 16: Hnlooen J. H Subsdzng ooeratve and nonooeratve R&D n duooly wth sllovers Journal of Eonoms Zetshrft fur Natonalokonome 66: Kabra T. and S. Mart 199 Tehnology and re n a non-ooeratve framework Internatonal Revew of Eonoms and Fnane 1: Kabra T. and A. Mukheree 000 Cooeraton n R&D and roduton: a three frm analyss Journal of Eonoms Zetshrft fur Natonalokonome 71: Katz M.L. and C. Sharo 1985 On the lensng of nnovatons RAND Journal of Eonoms 16: Lee T. and L. Wlde 1980 Market struture and nnovaton: a reformulaton Quarterly Journal of Eonoms 94: Ln P Fed-fee lensng of nnovatons and olluson The Journal of Industral Eonoms XLIV: Loury G Market struture and nnovaton Quarterly Journal of Eonoms 9: Mukheree A. and N. Balasubramanan 001 Tehnology transfer n horzontally dfferentated rodut-market Researh n Eonoms Rherhe Eonomhe 55: Rokett K The qualty of lensed tehnology Internatonal Journal of Industral Organzaton 8: Sothmer S Protetng early nnovators: should seond-generaton roduts be atentable? RAND Journal of Eonoms 7: Suzumura K. 199 Cooeratve and non-ooeratve R&D n an olgooly wth sllovers The Ameran Eonom Revew 8:

18 KERP Keele Eonoms Researh Paers Reent Contrbutons All aers n the ker seres are avalable for downloadng from the Keele Eonoms webste va 00/11 Dssaton In Rent-Seekng Contests Wth Entry Costs Rhard Cornes and Roger Hartley 00/10 Advantageous or Dsadv. Sem-olluson Lensng n a Vert. Searated Industry Art Mukheree 00/09 Lensng n a Vertally Searated Industry Art Mukheree 00/08 U-shaed Paths of Consumton and Phys. Catal n Luas-tye Growth Models Farhad Nl 00/07 On the Varane Covarane Matr of the M.L. Estmator of a Dsrete Mture Gauther Lanot 00/06 Monotonty and the Roy Model Arnaud Chevaler and Gauther Lanot 00/05 Caaty Commtment and Lensng Art Mukheree 00/04 Household Credt and Savng: Does Poly Matter? Peter Lawrene 00/0 Innovaton Lensng and Welfare Art Mukheree 00/0 Hstoral Shools of Eonoms: German and Englsh Keth Trbe 00/01 R&D Lensng and Patent Proteton Art Mukheree 001/09 Eort and Dret Investment as a Sgnal n Global Markets Art Mukheree and Udo Broll 001/08 The Welfare Effets of Qualty Degradaton wth Network Eternaltes Jong-Hee Hahn 001/07 Cost Paddng n Regulated Monooles Sros Bougheas and Tm Worrall 001/06 Is the Unsklled Worker Problem n Develong Countres Gong Away? Ed Anderson 001/05 Does Soety Prefer Small Innovaton? Art Mukheree 001/04 Blateral Merger n a Leadersh Struture Tarun Kabra and Art Mukheree 001/0 Imtaton Patent Proteton and Welfare Art Mukheree and Enro Pennngs 001/0 R&D Organzaton and Tehnology Transfer Art Mukheree and Sugata Mart 001/01 Internatonal Jont Venture and the Tehnology of the Future Sugata Mart Art Mukheree and Tarun Kabra

19 KERP Keele Eonoms Researh Paers Reent Contrbutons All aers n the ker seres are avalable for downloadng from the Keele Eonoms webste va 000/0 Gft-Gvng Quas-Credt and Reroty Tm Worrall and Jonathan P Thomas 000/19 Land Rents and Comettve Equlbrum Martn E. Dedrh 000/18 Monooly Qualty Dfferentaton wth To-qualty Deendent Fed Costs Jong-Hee Hahn 000/17 Tme Conssteny and Intergeneratonal Rsk Sharng Tm Worrall 000/16 The Mamum Interest Rate on an Unbalaned Growth Path Martn E. Dedrh 000/15 Nonlnear Prng of a Teleomm. Serve wth Call and Network Eternaltes Jong-Hee Hahn 000/14 Rent- seekng by Players wth Constant Absolute Rsk Averson Rhard Cornes and Roger Hartley 000/1 Dfferental Interest Rates on Unbalaned Growth Paths Martn E. Dedrh 000/1 Funtonal Qualty Degradaton of Software wth Network Eternaltes Jong-Hee Hahn 000/11 Network Cometton and Interonneton wth Heterogeneous Subsrbers Jong-Hee Hahn 000/10 On Monetary Poly Imlatons of Credt Ratonng under Asymmetr Informaton Frédérque Braoud 000/09 Cost of Regulaton n Eduaton: Do Shool Insetons Imrove Shool Qualty? Lesle Rosenthal 000/08 Intertemoral Substtuton and Gamblng for Long-Lved Agents Roger Hartley and Lsa Farrell 000/07 Jont Produton Games and Share Funtons Rhard Cornes and Roger Hartley 000/06 The Value of Seondary Shool Qualty n England Lesle Rosenthal 000/05 The Effets of Polluton and Energy Taes aross the Euroean Inome Dstrbuton Elzabeth Symons Stefan Sek and John Proos 000/04 Heterogeneous Demand Resonses to Dsrete Pre Changes Roger Hartley and Gauther Lanot 000/0 The Long-Run Labour Market Consequenes of Teenage Motherhood Arnaud Chevaler and Tara K. Vtanen 000/0 Eonom Soetes n Great Brtan and Ireland before 190 Keth Trbe 000/01 Fnanal Transfers and Eduatonal Ahevement Arnaud Chevaler and Gauther Lanot

20 ssn Deartment of Eonoms Keele Unversty Keele Staffordshre st5 5bg Unted Kngdom tel: fa: emal: web: