Patent Licensing and Entry Deterrence: The Role of Low Royalties

Anne Duchene, Drexel University - Department of Economics & International Business, Debapriya Sen, Ryerson University, Faculty of Arts - Department of Economics, and Konstantinos Serfes, Drexel University - School of Economics examine Patent Licensing and Entry Deterrence: The Role of Low Royalties.

ABSTRACT: We study how an incumbent patent holder can use licensing strategically to reduce the threat of further entry, through a low royalty. This licensing strategy deters entry by making the terms of future licensing agreements less favourable to potential entrants. Strategic licensing induces a trade‐off between a more concentrated market and a lower price. When this strategy is profitable for the patent holder, it is welfare enhancing if and only if the entry cost is high, or the efficiency edge of the technology is significant. Our analysis yields new policy implications (e.g. royalty floor) with respect to strategic licensing.