Bargaining in Patent Licensing with Inefficient Outcomes

Abstract. The classical work of Gilbert and Newbery (1982) (GN) shows that a monopolist has an incentive to maintain its monopoly power by patenting new technologies to preempt potential competition, leading to patents that are neither used nor licensed to others. However, in the presence of outside labs it is not always the case that the monopolist is aware of all potential competing technologies and it may face a new technology that if licensed to new entrant can hurt its profit. In this paper we study the scenario in which an outside innovator holds a new technology which has no industrial value to the monopolist but allows a profitable entry. The willingness to pay of the monopolist for the IP is positive, even if this means shelving the innovation. We show that a credible damage of the new technology on the incumbent may be higher when the innovator sells a few licenses to entrants before bargaining with the incumbent firm over the IP. Such action of the innovator although brings in competition into the market, it increases the bargaining power of the innovator as it increases the incumbent's willingness to pay. In this case entry occurs under certain parameters, contrary to the case discussed in GN.