Title: Innovation and Transfer of Technology Decomposing the Benefits of Cost Reducing Innovation
Abstract: This paper analyzes interaction of two identical firms in a price reciprocating
competition and introduces value of unpredictability in a mixed strategy game. Further,
it examines the sensitivity of firm values to different idiosyncratic shocks in preinnovation
stage. In the post innovation stage, the study finds that the price and quantity
effect of cost reducing innovation are linear in cost reduction and depends only on price
elasticities of demand. The study also finds that proprietary benefits of innovation
induces switching effect and demand innovation premium. At the end of this paper we
suggest a simple license pricing scheme for sharing the benefits of innovation both for
complete and partial transfer of technology. In our analysis, shared benefits of nondrastic
innovation provide a win-win situation for both firms.
Publication Year: 2009
Publication Date: 2009-05-20
Language: en
Type: article
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