Fee vs. Royalty Licensing and Consumers’ Welfare

In a duopolistic trade model we have shown that a tariff can influence the optimal licensing strategy of the foreign firm. A high tariff will induce fee licensing and a low tariff will result in a royalty licensing. From the viewpoint of the consumers both high tariff and high royalty are distortionary; hence there is a trade-off between a tariff and a royalty. Assuming consumers’ welfare maximization as an objective of the government, we show that royalty licensing is induced if the cost saving under foreign technology is small; otherwise fee licensing is induced by an appropriate choice of tariffs.