Innovation Incentive of Downstream Firms in Stackelberg Duopoly Model

The licensing strategies and innovation incentives of downstream firms in a Stackelberg duopoly model were analyzed under three respective assumptions that upstream industry is monopoly, duopoly, or perfect competition. It is found that the Stackelberg firm may license his drastic innovation by a fixed royalty rate which is lower than innovalion size. The incentives of drastic innovation of Stackelberg firm facing input suppfiers with market power decrease considerably even onder royalty licensing, compared with facing perfectly competitive input market.