Cross-licensing agreements in presence of technological improvements

Abstract

This study investigates the relationship between technologies that firms expect to achieve after cross-licensing (CL) and their incentives for signing CL agreements in a multiproduct-firm setting. Results indicate that if markets are bounded substantial technological improvements that result in removal of firms’ current products from the market may in fact reduce firms’ incentives to negotiate a CL deal. This may also give firms an incentive to agree upon a tacit collusion by which they limit the utilization of CL technologies. However, when markets are unbounded, the prospect of capturing new markets and charging royalty fees can significantly increase firms’ incentives for CL. The rationale behind our modeling assumptions is discussed using example from agriculture biotechnology industry.