This paper challenges the conventional wisdom that exclusive owners of an advanced technology are always better off when producing as a monopolist than when competing against another firm. Competition against a less-efficient firm weakens the power that a host country can exert on the incumbent in the form of its tariff policy. We show that this gives a motive for a monopolist to license its technology to another foreign firm. A host country gains more from increased competition if it can induce the foreign incumbent to transfer technology to the host country firm. We show that the host country can do so by tariff commitment. We also discuss the implications of bargaining under licensing and Bertrand competition in the product market. Hence, this paper qualifies and extends the recent work of Kabiraj and Marjit [Protecting consumers through protection: The role of tariff-induced technology transfer. European Economic Review 47, 113–124].

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Keywords licensing, market structure, tariff protection
JEL Oligopoly and Other Forms of Market Imperfection (jel D43), Commercial Policy; Protection; Promotion; Trade Negotiations; International Organizations (jel F13), Oligopoly and Other Imperfect Markets (jel L13)
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Journal European Economic Review
Mukherjee, A, & Pennings, H.P.G. (2006). Tariffs, Licensing and Market Structure. European Economic Review, 50(7), 1699–1707. doi:10.1016/j.euroecorev.2005.08.005