Technology Licensing in Vertical Markets: A Spatial Model

We consider two symmetric vertical supply chains that sell differentiated products in a single downstream spatial market. An outsider innovates a cost reducing process and we explore a series of issues unique to the spatial market. The key finding is that the use of spatial price discrimination increases competitive intensity downstream and causes the outside innovator to be more likely to use a fixed fee. Uniform pricing, with its blunted downstream competition, causes the innovator to use a royalty. We explore variations in whether the innovation is oriented to one or both products and whether it is oriented upstream or downstream.