DECISION MAKING ON STRATEGIC

September 30, 2009 18:15 WSPC/173-IJITDM

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International Journal of Information Technology & Decision Making Vol. 8, No. 3 (2009) 609–624 c World Scientific Publishing Company

DECISION MAKING ON STRATEGIC ENVIRONMENTAL TECHNOLOGY LICENSING: FIXED-FEE VERSUS ROYALTY LICENSING METHODS

MING-CHUNG CHANG Department of Risk Management, Kainan University No. 1 Kainan Rd., Luchu, Taoyuan County 338, Taiwan [email protected] JIN-LI HU Institute of Business and Management, National Chiao Tung University No. 118, Sec. 1, Chung-Hsiao W. Rd., Taipei 100, Taiwan [email protected] GWO-HSHIUNG TZENG∗ Department of Information Management, and Department of Business and Entrepreneurial Management, Kainan University No. 1 Kainan Rd., Luchu, Taoyuan County 338, Taiwan Institute of Management of Technology, National Chiao Tung University 100, Ta-Hsueh Rd., Hsinchu 300, Taiwan [email protected]

Because of a deterioration in the quality of the environment, this paper studies the effects of the environment and the economy on environmental technology licensing in a homogeneous Cournot duopoly model in order to reduce environmental pollution and hence improve social welfare. To this end, two licensing methods — namely, a fixed-fee licensing method and a royalty licensing method — are compared. It is found that a high emission tax rate induces the innovator to not license the environmental technology to the licensee under the fixed-fee licensing method. As for social welfare, a large innovation scale of environmental technology does not guarantee that social welfare will be maximized. Finally, a large innovation scale of environmental technology is likely to increase consumer surplus if the marginal environmental damage is significant. Consumers are likely to prefer royalty licensing to fixed-fee licensing. This conclusion differs from Wang’s finding in 2002. Keywords: Game theory; licensing; innovation; fixed-fee; royalty.

1. Introduction The diffusion of environmental technology can be achieved through the channel of licensing. In order to realize the diffusion of environmental technology, the U.S. ∗ Corresponding

author. 609


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M.-C. Chang, J.-L. Hv & G.-H. Tzeng

Environmental Protection Agency set up the National Environmental Technology Cooperation Center, with one of its functions being environmental technology licensing.1 Some large laboratories, such as the Los Alamos National Laboratory, also publish information regarding environmental technology licensing on their websites in order to inform private firms about these environmental technologies.2 Some multi-national corporations, such as Dow Chemical, also do the same thing.3 Universities, in addition, publish their R&D results regarding environmental technology and inform private firms so as to provide them with a chance to license those results.4 The global trend has been for governments to encourage the domestic and international licensing of environmental technologies. The chemical industry with its significant quantity of pollutants is a rich source of motivation for this. For instance, British Petroleum (BP) Chemicals is not only a major producer in the polyethylene market, but also a leading licensor of polyethylene technology. Firms in the chemical industry, such as BP Chemicals, Union Carbide, and Dow Chemical, actively compete in the quantity of production. Moreover, environmental technology licensing aids economic growth while protecting the earth. This paper performs a formal analysis of environmental technology licensing and its economic and environmental effects. There is a strategic incentive for licensing which prevents rivals from entering the market. Gallini5 believes that the market leader should share an innovation with a rival through a license contract. If the market leader shares the innovation with a rival, then it maintains a dominant position while reducing the incentive of the entrant to develop better technology. This is the reason why a firm engages in strategic technology licensing. However, Reinganum6 finds that the advantageous position may change hands through great innovation when the entrant gains more by developing new environmental technology. The dominant strategy for the market leader is investment in additional innovation.7 The existing literature on technology licensing consists of two major streams. The first stream concerns the impact of strategic technology licensing on innovation activities, which is found in the journal articles of Gallini and Winter,8 Katz and Shapiro,9 and Grossman and Shapiro.10 Gallini and Winter8 only take into account royalty licensing, i.e. analyzing royalty licensing in a noncooperative R&D game. They find that in a duopoly market the availability of licensing encourages research when the firms’ initial production technologies are close in terms of costs and discourages research when initial costs are asymmetric. Conversely, Katz and Shapiro9 only consider fixed-fee licensing. The other stream of the literature on technology licensing covers the choice of licensing methods, for example, Kamien11 and Wang.12 Kamien11 looks at two kinds of competition, Bertrand and Cournot, as well as two kinds of licensing methods: fixed-fee licensing and royalty licensing. He finds in those models that fixed-fee licensing is better than royalty licensing from the point of view of a patent-holding firm. Wang12 shows that if the cost-reducing


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innovation is a nondrastic innovation, then royalty licensing for a licensing firm is better than fixed-fee licensing.a In the earlier literature, the right of technology licensing belongs to the patent holder, which is not a producer, while producers use inferior production technologies. In this setting, Kamien and Tauman14 find that licensing by means of a fixed fee is superior to licensing by means of a royalty for the patent holder. In recent papers, the right of technology licensing belongs to the patent holder that is a producer and other producers use inferior technologies. Under such circumstances, Wang12 compares the licensing method by means of both a fixed fee and a royalty with homogeneous goods in a duopoly market in which one of the firms has a costreducing innovation. He shows that royalty licensing may be better than fixed-fee licensing for the patent-holding firm with a nondrastic innovation. Wang15 extends the homogeneous goods model to a differentiated goods duopoly model with fixed-fee licensing and royalty licensing. He finds that royalty licensing may be superior to fixed-fee licensing for the patent-holding firm. However, fixed-fee licensing is always superior to royalty licensing by consumers. In all of the papers mentioned above, the pollution issue is not discussed at all. Technological innovation that leads to cost reduction is only mentioned in the above literature, but not environmental technological innovation leading to pollution reduction, as in this study. The optimal licensing method depends on the licensor’s profit in the existing literature, whereas the optimal licensing method depends on social welfare in this study. This is the most obvious difference between the existing literature and this study. Game theory has been extensively applied to the field of decision-making science, including license management,16 technology innovation strategy,17 Internet trade,18 a firm’s strategy in a supply chain,19 and a firm’s auction strategy.20 We also apply game theory, the Cournot duopoly model with homogeneous products, to analyze the issue of environmental technology licensing under alternative licensing methods — namely, fixed-fee licensing and royalty licensing. In this study, the government’s decision making for maximizing social welfare is according to firms’ competitive strategies, and the firms’ decision making on competitive strategies depends on the information of the product market and of the rival’s strategy. The decision makers in this study are the government and firms. Each of these players collects information about the other. Therefore, environmental technology licensing can be fully explored in the framework of decision making. The remainder of this paper is organized as follows: In Sec. 2, the basic model is presented. Section 3 offers the model’s analysis and some discussions derived from the model’s analysis. Finally, conclusions are presented in Sec. 4. aA

cost-reducing innovation is drastic13 if it is significant enough to create a monopoly with the reduced cost; otherwise, it is nondrastic (see Sec. 2.3).


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2. The Model’s Set-up There are two firms (firms A and B) manufacturing homogeneous products, such that when produced by both firms they give rise to some pollution. Only firm A is characterized by environmental technology innovation. While each firm initially has a per unit emission of e > 0, we normalize e to 1. Because firm A has a new environmental technology, its product has a lower per unit emission of 1 − ε > 0, where 0 < ε < 1 is the pollution abatement level, or the innovation scale of environmental technology. When ε is close to 1, the innovation scale of environmental technology is large; on the contrary, when ε is close to 0, the innovation scale of environmental technology is small. If firm A licenses the environmental technology to firm B, then firm B’s per unit emission is also 1 − ε. On the contrary, if firm A does not license the environmental technology to firm B, then firm B’s per unit emission is 1. The linear market demand function is: p = 1 − (qi + qj ),

(1)

where i, j = A or B, and i = j. Parameter p is denoted as the product’s market price. As shown by the inverse demand function in Eq. (1), an increase in the total quantity supplied (qi +qj ) will decrease the market price (p). The parameters qi , and qj represent firm i’s and firm j’s quantities, respectively. Without loss of generality, both firms’ unit production costs are assumed to be zero. In order to solve the issue of environmental technology licensing, we use a fourstage game. In the first stage, the government chooses an emission tax rate to maximize social welfare. In the second stage, firm B decides whether to accept firm A’s licensing. In the third stage, firm A chooses the optimal licensing method: fixedfee licensing or royalty licensing. In the fourth stage, the two firms are engaged in Cournot competition. The game in this study is combined with four stages, i.e. Stages 1, 2, 3, and 4. If the strategies in every sub-game are Nash equilibrium, then a strategy profile of a complete game is a sub-game perfect Nash equilibrium (SPNE). Since the complete game itself is also a sub-game, then the SPNE is also a Nash equilibrium. In a finite stage game where each player has perfect information, the SPNE can be found through backward induction. Thus, we employ backward induction starting from Stage 4 to Stage 1 to find the SPNE.

3. The Model’s Analysis In this part of the paper, we present the solution process from Secs. 3.1–3.4. Section 3.1 discusses the licensing circumstances and the no-licensing circumstances. The two firms’ SPNE outputs and profits are also obtained in this section. Section 3.2 determines the innovator’s optimal licensing method. Section 3.3 studies the strategic behavior of the licensee with respect to the acceptance of licensor’s


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licensing. Section 3.4 discusses the government’s environmental policy. Besides, we also discuss some extensive issues in Sec. 3.5. 3.1. The solution in Stage 4 We consider two different circumstances as follows: licensing and no licensing. The SPNE outputs and profits are calculated for each set of circumstances. 3.1.1. Licensing Each firm searches for a maximum profit and each firm is subject to an emission tax. The emission tax falls when a firm adopts a new environmental technology which reduces the amount of the emission. This is the motivation for firms to adopt a new environmental technology. The licensor also can obtain additional revenue from licensing. Quantity competition under the royalty licensing method. If firm A licenses to firm B using the royalty licensing method, then firm B must pay a royalty ρ > 0 per unit of output to firm A. In other words, firm B’s per unit output cost increases ρ. Because firm B uses a new environmental technology, it can save an emission tax tε > 0 per unit of output, where t > 0 is the emission tax rate. If firm A does not license, then firm B’s per unit output cost is 0. Hence, the royalty per unit of output cannot be higher than tε, i.e. 0 < ρ ≤ tε. When two firms have a new environmental technology, their per output pollution tax can be reduced from t to t(1 − ε). At this time, firm A’s profit function is πA = (1−qA −qB )qA −t(1−ε)qA, and its reaction function is qA = [1−qB −t(1−ε)]/2, where 0 < t(1 − ε) < 1, and this condition ensures that the firms’ output and profit are not negative numbers. Firm B’s profit function is πB = (1 − qB − qA − ρ)qB − t(1 − ε)qB and its reaction function is qB = [1 − qA − ρ − t(1 − ε)]/2. By using the two firms’ reaction functions, we calculate the SPNE quantities and profits in the third stage using the royalty licensing method (superscript R denotes the royalty licensing method): R = qA

[1 − t(1 − ε)] + ρ , 3

[1 − t(1 − ε)] − 2ρ , 3 2 [1 − t(1 − ε)] + ρ R πA = , 3 2 [1 − t(1 − ε)] − 2ρ R = . πB 3 R = qB

(2) (2 ) (3) (3 )

Quantity competition under the fixed-fee licensing method. Under the fixed-fee licensing method, firm i’s profit function is given by πi = (1 − qi − qj )qi − t(1 − ε)qi .


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Firm i chooses qi to maximize πi and its reaction function yields qi = [1 − qj − t(1 − ε)]/2. By using the two firms’ reaction functions, we calculate the SPNE quantities and profits in the third stage under the fixed-fee licensing method (superscript F denotes the fixed-fee licensing method): qiF = πiF

1 − t(1 − ε) , 3

1 − t(1 − ε) = 3

(4)

2 .

(4 )

3.1.2. No licensing Under the situation where there is no licensing, because firm B does not have any new environmental technology, it has a probability of being kicked out of the market. The pollution abatement level (ε) determines whether firm B is kicked out of the market. If the pollution abatement level is sufficiently large to cause firm B to be kicked out of the market, then the market structure turns into a monopoly. We refer to this situation as a drastic innovation. On the contrary, if the pollution abatement level is insufficiently large to result in firm B not being kicked out of the market, then the market structure turns into a duopoly. We refer to this situation as a nondrastic innovation. Non-drastic innovation. In the case where there is nondrastic innovation, firm A’s profit function is πA = (1 − qA − qB )qA − t(1 − ε)qA , and its reaction function is qA = [1 − qB − t(1 − ε)]/2. Firm B’s profit function is πB = (1 − qB − qA )qB − tq B , and its reaction function is qB = [1 − qA − t]/2. By using the two firms’ reaction functions, we calculate the SPNE quantities and profits in the third stage under the no-licensing situation (with superscript NL denoting the no-licensing situation): NL = qA

(1 − t) + 2tε , 3

(5)

(1 − t) − tε , 3 2 (1 − t) + 2tε = , 3

NL qB =

NL πA

NL πB

(1 − t) − tε = 3

2

.

(5 )

(6)

(6 )

Drastic innovation. When drastic innovation takes place, firm B is kicked out of the market and firm A becomes a monopoly. From Eq. (5 ), we obtain the condition whereby firm B drops out of the market as ε ≥ (1−t)/t. Hence, any ε that is greater


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than or equal to (1 − t)/t is referred to as drastic innovation. On the contrary, we refer to this as nondrastic innovation when: ε
πA only if the following condition is satisfied: 2 1−t ε < ε1 = . (9) 3 t


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ε 1

2 1− t ε1 = ( ) 3 t U

T

V

R

2/3

non − drastic innovation

1− t t S

0

1/ 2

1

t

Fig. 1. The licensing zone and no-licensing zone under fixed-fee licensing.

Parameter ε1 represents the critical curve of licensing and no licensing. The critical curve which is the right-hand side of Eq. (9) meets the nondrastic innovation condition in Eq. (7) i.e. ε1 < (1 − t)/t for any t. We use Fig. 1 to describe the licensing zone and no-licensing zone under the fixed-fee licensing method. In Fig. 1, area RS0U meets the nondrastic innovation condition. Moreover, area TS0U not only meets the nondrastic innovation condition, but also meets firm A’s licensing condition using the fixed-fee licensing method in Eq. (9). Hence, area TS0U is the licensing zone and area RST is the no-licensing zone. For the licensor, there are two licensing effects: one is the licensing revenue effect and the other is the sales revenue effect. Because the licensing revenue effect is smaller than the sales revenue effect in area RST, firm A does not license the new environmental technology to firm B. On the contrary, because the licensing revenue effect is larger than the sales revenue effect in area TS0U, firm A licenses the new environmental technology to firm B. In other words, when the emission tax rate is low, the licensee can save a lot on emission tax. The licensor uses the fixed-fee licensing method to obtain the licensee’s saving on emission tax. On the other hand, because the fixed-fee licensing method cannot change the licensee’s marginal cost, the market competitive degree can also not be affected by the fixedfee licensing method. Hence, the licensing revenue effect dominates the sales revenue effect when the emission tax rate is low. When the emission tax rate is high, the licensor can obtain little by way of savings on the emission tax from the licensee. At this time, the licensing revenue effect is dominated by the sales revenue effect. This phenomenon is obvious when the innovation scale of environmental technology is large. Hence, the licensor is not willing to license a new environmental technology


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to the licensee when the emission tax rate is high or when the innovation scale of environmental technology is large. 3.2.2. The royalty licensing method Under the royalty licensing method, firm B must pay a royalty ρ per unit of good that it has produced from obtaining the new environmental technology. R ) is Because 0 < ρ ≤ tε, firm A’s profit from the royalty licensing method (πA NL equal to or less than its profit from no licensing (πA ), and firm B’s profit after R NL ) is larger than its profit from no licensing (πB ). Thus, firm B being licensed (πB asks firm A to license the new environmental technology. However, firm A is not willing to license the technology. If firm A promises to license it, then it will ask firm B for a licensing fee in order to compensate for the loss of its profits. R R + ρqB as follows: After licensing, firm A’s total licensing profit is πA 2 [1 − t(1 − ε)] + ρ [1 − t(1 − ε)] − 2ρ R R +ρ πA + ρqB = . (10) 3 3 Firm A chooses ρ to maximize its total licensing profit. The royalty rate is thus: 1 [1 − t(1 − ε)]. (11) 2 The second-order optimality condition is also satisfied. If the total licensing profit R R NL (πA + ρqB ) is larger than the no-licensing profit (πA ), then the following condition has to be satisfied: 5 1−t 1−t . (12) − 0, D > 0. We assume that the environmental damage function has a quadratic form — that is, D = (λ/2)E 2 , with λ > 0. Parameter λ is defined as the marginal environmental damage. If the emission amount damages the environment significantly (lightly), then λ is a large (small) number. According to the first-order condition from Eq. (13), the optimal emission tax rate that induces a maximized social welfare is:

tR =

1 + λ(1 − ε) > 0. 5 + λ(1 − ε)2

(14)

The second-order optimality condition is also satisfied. Let us derive Eq. (14) with respect to parameters λ and ε, respectively. We obtain the comparative static results as follows: ∂tR /∂λ > 0 and ∂tR /∂ε < 0. This implies that when the marginal


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environmental damage is large, the government should increase the emission tax rate to upgrade social welfare. When the marginal environmental damage is small, the government should decrease the emission tax rate to increase firms’ output in order to upgrade social welfare. In order to maximize social welfare, when the innovation scale of environmental technology is large, the government should decrease the emission tax rate. When the innovation scale of environmental technology is small, the government should increase the emission tax rate. Proposition 2. Both the emission tax rate and the innovation scale of environmental technology have an environmental protection effect. However, there is an opposite relationship between the optimal emission tax rate and the innovation scale of environmental technology. 3.5. Some discussions We next discuss some of the issues derived from the above model analysis. Because the focus of this study is on environmental technology licensing, we discuss two issues that are lacking in previous technology licensing literature. They are the model’s analysis on social welfare implications and consumer surplus under the optimal emission tax rate. The results of this study are then compared with the results in the previous literature. 3.5.1. The analysis of the model’s social welfare implications By substituting Eq. (14) into Eq. (13), we obtain social welfare as a function of the marginal environmental damage and the innovation scale of environmental technology, i.e. SW = SW (λ, ε). The relationship between social welfare and the two parameters is as follows (Fig. 3). Given that the innovation scale of environmental technology is less than 1, the greater the marginal environmental damage is, the lower social welfare will be. This is because the environmental damage function is a negative term in the social welfare function. When the innovation scale of environmental technology is equal to 1, social welfare for various magnitudes of marginal environmental damage is the same. This is because, when the innovation scale of environmental technology is equal to 1, it induces the environmental pollution effect in the social welfare function to disappear. The paths of the four social welfare functions are inverse-U shapes. This implies that there is an optimal innovation scale of environmental technology that achieves maximized social welfare. In order to maximize social welfare, the larger the marginal environmental damage is, the larger will be the innovation scale of environmental technology. We have demonstrated that both the optimal emission tax rate and the innovation scale of environmental technology have an opposite relationship in Proposition 2. This induces the path of social welfare to become an inverse-U shape.


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SW

λ = 0.5

λ =1 λ =2 λ =3

0

ε’

ε ’’

ε ’’’ 1

ε

Fig. 3. The comparison of social welfare.

Proposition 3. Under the optimal emission tax rate, when the innovation scale of environmental technology is large, it does not guarantee that social welfare will reach its maximum level. Proposition 3 explicitly discusses the relationship between the innovation scale of environmental technology and social welfare, which has caught little attention in the existing literature. Proposition 3 also implies that too much inputs into R&D will cause resource waste and a deviation from the optimal social welfare level. Thus, the government should induce firms to conduct R&D and to find the optimal innovation scale of environmental technology. 3.5.2. Consumer surplus under the optimal emission tax rate Because of the linear demand function assumption in Eq. (1), consumer surplus is R R 2 + qB ) . Thus, the formula for consumer surplus with the optimal simply (1/2)(qA emission tax rate is: 2 4+ε 1 R CS = . (15) 8 5 + λ (1 − ε)2 By deriving Eq. (15) with respect to parameters λ and ε, we obtain the comparative static results as follows: ∂CS R /∂λ < 0 and ∂CS R /∂ε > 0 if and only if λ > −5/(3ε2 + 4ε − 7) > 0. This implies that the greater the marginal environmental damage is, the less consumer surplus will be. This is because the government will increase the emission tax rate when the marginal environmental damage is large. A high emission tax rate induces firms to decrease output. The lower output induces a decrease in consumer surplus.


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A large innovation scale of environmental technology can increase consumer surplus when the marginal environmental damage is larger than −5/(3ε2 + 4ε − 7). This is because there is an opposite relationship between the innovation scale of environmental technology and the emission tax rate, whereby a large innovation scale of environmental technology induces the government to decrease the emission tax rate. A low emission tax rate induces firms to increase outputs. Because of the higher output, consumer surplus is induced to increase. Proposition 4. A large innovation scale of environmental technology does not guarantee that consumer surplus will increase. If there is significant marginal environmental damage, then a large innovation scale of environmental technology will increase consumer surplus. 3.5.3. Consumers’ preferences between fixed-fee licensing and royalty licensing In order to compare consumers’ preferences between fixed-fee licensing and royalty licensing, we determine the optimal tax rate under fixed-fee licensing. To do this, we substitute Eqs. (4) and (4 ) into Eq. (13) and derive Eq. (13) with respect to t. Based on the first-order condition, we obtain the optimal tax rate under fixed-fee licensing as follows: tF =

10λ(1 − ε)2 − 27 > 0, (1 − ε)[10λ(1 − ε)2 − 18]

if λ >

27 . 10(1 − ε)2

(16)

The consumer surplus formula under fixed-fee licensing with the optimal emission tax rate is: 2 1 CS F = 2 . (17) 10λ(1 − ε)2 − 18 From Eqs. (15) and (17), the difference between consumer surplus under royalty licensing and consumer surplus under fixed-fee licensing is: ε+4 1 R F + CS − CS = 2 4λ(1 − ε)2 + 20 10λ(1 − ε)2 − 18 ε+4 1 − × , 4λ(1 − ε)2 + 20 10λ(1 − ε)2 − 18 27 . (18) where λ > 10(1 − ε)2 We find that if CS R − CS F < 0, then λ < (92 + 18ε)/[2(1 − ε)2 (5ε + 18)]. On the other hand, if CS R − CS F > 0, then λ > (92 + 18ε)/[2(1 − ε)2 (5ε + 18)]. Thus, the consumer prefers royalty licensing to fixed-fee licensing when the marginal environmental damage is large enough. The reason for this conclusion is that the firms are less efficient under the optimal tax rate with fixed-fee licensing compared to the optimal tax rate under royalty licensing when the marginal environmental


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damage is sufficiently large. Consequently, the total output produced under fixed-fee licensing is less than that generated under royalty licensing, which causes consumer surplus to be smaller under fixed-fee licensing. Wang15 concludes that consumers always prefer fixed-fee licensing to royalty licensing, while this paper has a different conclusion. Wang does not consider environmental factors, making a firm’s output under the fixed-fee licensing method more than that under the royalty licensing method. Thus, without environmental concerns, consumers prefer fixed-fee licensing to royalty licensing. After considering environmental factors in model, the higher output is, the greater the pollution tax will be. Therefore, a higher pollution tax induces firms to decrease outputs. In other words, the pollution tax creates a distortion on a firm’s production behavior and the pollution tax also changes consumers’ preferences such that they may prefer royalty licensing to fixed-fee licensing.

4. Conclusions In this paper, we have tried to analyze the effects of economic and environmental protection under different licensing methods. This paper investigates the situation under a homogeneous duopoly when one of the firms owns the innovation related to environmental technology. Because the drastic innovation case is seldom encountered in the real world, we only discuss the nondrastic innovation case. In this paper, we arrive at the following results. The emission tax rate has an effect on an innovator when the innovator uses different licensing methods. Under the fixed-fee licensing method, if the emission tax rate is high, then the innovator is less likely to license an innovation to a licensee. However, regardless of what the magnitude of the emission tax rate is, the innovator always licenses an innovation to a licensee under the royalty licensing method. Moreover, the environmental technology innovator always prefers the royalty licensing method to the fixed-fee licensing method. There are two ways to protect the environment. The first is to implement a high emission tax rate, while the second way concerns the large innovation scale of environmental technology. Under the optimal emission tax rate, a large innovation scale of environmental technology will push the optimal emission tax rate to decrease. The opposite relationship between the optimal emission tax rate and the innovation scale of environmental technology induces the social welfare to have an inverse-U shape. This implies that a large innovation scale of environmental technology does not guarantee that social welfare will be maximized. However, one can be sure that when the marginal environmental damage is large, social welfare will decrease. We finally provide an analysis of the impact on consumer surplus. We find that a large innovation scale of environmental technology does not guarantee that consumer surplus will increase. However, when the marginal environmental damage is large, a big innovation scale of environmental technology will increase consumer


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surplus. Moreover, we also find that consumers are likely to prefer royalty licensing to fixed-fee licensing. This conclusion is different from Wang’s finding in 2002. References 1. U.S. Environmental Assessment Division, National environmental technology cooperation center (2004), Downloaded from the website: http://www.ead.anl.gov/project/. 2. Los Alamos National Laboratory, Licensing opportunities (2004), Downloaded from the website: http://www.lanl.gov/partnerships/licensing.htm. 3. Dow, What we license? (2004) Downloaded from the website: http://www.lanl.gov/ partnerships/licensing.htm. 4. University Technologies International, Technologies available for licensing, (2004) Downloaded from the website: http://www.uti.ca/tal.htm. 5. N. Gallini, Deterrence through market sharing: A strategic incentive for licensing, Am. Econ. Rev. 74 (1984) 931–941. 6. J. Reinganum, Uncertain innovation and the persistence of monopoly, Am. Econ. Rev. 73 (1983) 741–748. 7. O. K. Gupta, M. Mallikarjun, N. Cho and J. Jaisingh, Strategic response of an incumbent firm in IT intensive industry: A few reflections, Int. J. Inform. Technol. Decision Making 2 (2003) 373–380. 8. N. Gallini and R. Winter, Licensing in the theory of innovation, Rand J. Econ. 16 (1985) 237–252. 9. M. Katz and C. Shapiro, On the licensing of innovations, Rand J. Econ. 16 (1985) 504–520. 10. G. Grossman and C. Shapiro, Dynamic R&D competition, Econ. J. 97 (1987) 372–387. 11. M. I. Kamien, Patent licensing, in Handbook of Game Theory With Economic Applications, eds. R. J. Aumann and S. Hart, Vol. 1, Chapter 11 (Elsevier Science Publishers, North Holland, 1992), pp. 331–354. 12. X. H. Wang, Fee versus royalty licensing in a Cournot duopoly model, Econ. Lett. 60 (1998) 55–62. 13. K. J. Arrow, Economic welfare and the allocation of resources for invention, in The Rate and Direction of Inventive Activity: Economic and Social Factors, ed. R. Nelson (Princeton University Press, 1962), pp. 609–625. 14. M. I. Kamien and Y. Tauman, Fee versus royalties and the private value of a patent, Q. J. Econ. 101 (1986) 471–491. 15. X. H. Wang, Fee versus royalty licensing in a differentiated Cournot duopoly, J. Econ. Bus. 54 (2002) 253–266. 16. S. H. Kwok and S. M. Lui, A license management model for peer-to-peer music sharing, Int. J. Inform. Technol. Decision Making 1 (2002) 541–558. 17. T. Xiao, G. Yu and Z. Sheng, Reputation, utility and technological innovation strategies, Int. J. Inform. Technol. Decision Making 3 (2004) 81–100. 18. P. Dasgupta, P. M. Melliar-Smith and L. E. Moser, Maximizing welfare through cooperative negotiation in a multi-agent internet ecomomy, Int. J. Inform. Technol. Decision Making 5 (2006) 331–351. 19. D. Ding and J. Chen, Supply chain coordination with contracts game between complementary suppliers, Int. J. Inform. Technol. Decision Making 6 (2007) 163–175. 20. H. Yu, C. G. Dang and S. Y. Wang, Game theoretical analysis of buy-it-now price auctions, Int. J. Inform. Technol. Decision Making 5 (2006) 557–581. 21. J. R. Chiou and J. L. Hu, Environmental research joint ventures under emission taxes, Environ. Resour. Econ. 20 (2001) 129–146.