IP-for-IP or Cash-for-IP? R&D Competition and the Market for Technology

• Published in: Review of industrial organization Vol. 51; no. 1; pp. 75 - 101
• Main Authors: Herbst, Patrick, Jahn, Eric
• Format: Journal Article
• Language: English
• Published: New York Springer Science + Business Media 01-08-2017; Springer US; Springer Nature B.V
• Subjects: Allocation; Barter; Commercialization; Companies; Competition; Economics; Economics and Finance; Exchange (Economics); Free trade; Industrial Organization; Licensing; Microeconomics; R&D; Research & development; Resource allocation; Technology; Trading; Transactions; Technology trade; Cross-licensing; R&D competition; Intellectual property; IP-for-IP; O31; L11; O32
• ISSN: 0889-938X; 1573-7160
• DOI: 10.1007/s11151-016-9542-z

We analyze how firms might benefit from trading restrictions in the market for technology. We show that restricting trade to reciprocal exchange (“IPfor-IP” barter instead of cash transactions), as in cross-licensing agreements, alters the allocation of R&D resources and reduces overinvestment in R&D. The tighter are the trading restrictions, the higher are the costs that are due to forgone gains from trade. Our analysis of the trade-offs involved shows that firms benefit from IPfor-IP restrictions, compared to both free trade and no trade environments, in industries where: (1) firms differ in their capabilities to commercialize IP; and (2) patent complementarities exist.