Question

1. Answer all parts (a), (b), and (c) of this question.
   1. [10 marks] Illustrate and explain what is meant by a “double marginalisation problem” in technology licensing.
   2. [20 marks] A single (monopoly) upstream licensor proposes to supply an input under license to a single (monopoly) downstream licensee. This input has the effect of reducing the marginal cost of production of the downstream firm. The licensor proposes a contract whereby the licensee pays an up-front fixed fee but no recurrent royalty for the input. Does this solve the double marginalisation problem? Would both firms accept such a contract? Does your answer depend on whether there is full information on the quality of the input?   Explain.
   3. [20 marks] An alternative to the license in part (b) is to merge the two firms together in order to bring the technology transfer inside the firm. Does this solve the double marginalisation problem? Explain, relating your results to those of part (b) as appropriate.

Answer 1

a. Double marginalization problem refers to a problem that reduces the welfare of the society in the market where limited large firms serve their products to the whole market. This problem does not occur in a competitive market. Double marginalization refers to the situation when firms at the vertical level of the same supply chain mark-up their prices. It will lead to increase the price more than the monopoly price; for example, input provider increase the price, and the manufacturer also increases his margin, that will lead to increase the time from higher proportion.

b. A single upstream licensor is a person at a higher level than a single downstream licenser. Under this case, licensor proposed an up-front fixed fee on the licensee. Technological license reduces the marginal cost, but at the same time, an additional fee increases the cost of holding license; therefore, the licensee will also increase the price of the products to sell in the market. Hence, this does not solve the problem of double marginalization. The conclusion depends upon the cost of a license, not on the quality of the input.

c. If both the parties (firms) agree to merge to make a transfer of technology inside the firm, this will make it a single entity; therefore, any increase in price will have the equal and same effect of consumers. This merger can solve the double marginalization problem. In part (b), licensor and licensee makes a mark-up individually, which makes the price higher than in part (c) where firms merged due to which there will be only one mark-up.