More licensed technologies may make it worse: a welfare analysis of licensing vertically two-tier foreign technologies

This research analyzes the impacts of acquiring vertically two-tier cost-saving foreign technologies through licensing on the home economy’s industry profit, consumer surplus, and social welfare. It is found that upstream (downstream) licensing only leads to higher social welfare than the two-tier licensing if the downstream innovation size is small (large) — that is, acquiring more licensed foreign technologies at different tiers in vertically related markets may worsen the domestic welfare. The above results still hold in leader–follower competition under the two-tier licensing regime and even for the case where this two-tier cost-saving technology is present within the home economy itself.