The Mode of Technology Licensing and Input Price Discrimination

We examine the welfare implication of technology licensing and input price discrimination in the vertically related market wherein two downstream firms purchase a cost-saving technology from an outside innovator and input factors from a monopolistic supplier to produce final goods. We show that input price discrimination affects the input prices and the mode of the license contract. The innovator strategically offers a royalty contract under discriminatory pricing but a fixed-fee contract under uniform pricing. Banning price discrimination improves social welfare and compensation to the innovator. Moreover, banning price discrimination may paradoxically accrue more profits to the monopolistic supplier.