Compulsory Trademark Licensing

The compulsory licensing of trademarks recently has received attention from economists and policymakers. A 2-period model is used to delineate the general welfare issues implicitly raised by trademark licensing proposals. The model shows clearly that companies invest in consumer trial through low prices and high advertising in a new product's introductory phase. Licensing will decrease the incentives for such intensive promotion, introducing a trade-off between lower prices under licensing and a reduction in the speed of consumer adoption of the product. Moreover, the important impact of licensing on trial will be felt in terms of its incentive effects on other promotional strategies through which the company enjoys an advantage over consumers in providing information. Another important factor that was isolated in the analysis is the relationship between entry and licensing. If entry will occur without licensing, then the case for licensing is weakened significantly. Licensing is most likely to be beneficial when entry is blockaded.