Transformations  in
Business & Economics

LICENSING STRATEGY AND TARIFF POLICY IN AN INTERNATIONAL TRADE MODEL WITH FOREIGN STACKELBERG LEADERSHIP
Le Yang, Qingyou Yan, Tomas Balezentis, Ming Li

ABSTRACT. In this paper, we formulate an international duopolistic trade model to investigate the two-part tariff licensing strategy for a leader foreign firm. It is found that the optimal licensing contract includes only the royalty with a rate above the cost reduction for a low tariff rate, whereas it includes only the fixed fee for a high tariff rate; as for the tariff rate that falls in between, both the fixed fee and the royalty are included.
 The result implies that the tariff will be an effective policy instrument that can be manipulated by the domestic government to affect a leader foreign firm's licensing strategy to achieve different purposes. Based on this, we find then that from the domestic government's perspective, there always exists a conflict between consumers' welfare and the overall social welfare regarding the optimal choice of a tariff rate.

KEYWORDS:  technology licensing, two-part tariff contract, fixed-fee, royalty, Stackelberg competition, Tariff policy.

JEL classification:  D43, F13, L13, L24.