On the Dynamics of Technology Transfer

Frago Kourandiy, Sabina Sachtachtinskagiaz, Nikolaos Vettas

University of Cyprus

2015

We study the strategic timing and pace of cost reducing technology transfer by an upstream monopolist to a downstream market when there is potential competition downstream and the protection of intellectual property rights is imperfect. The possibility that the downstream firm may not fully compensate the upstream firm for the benefits that it has received, creates "hold-up" issues. In equilibrium transfer occurs to the same downstream firm in both periods, however the contractual relationship is crucially affected by the presence of competitors - in particular, there is a delay in technology transfer, relative to the vertical integration benchmark. The upstream firm is trying to limit the downstream firm's bargaining power, in an effort to pay lower rent or no rent in the subsequent period. Price competition downstream does not fully eliminate the opportunistic behavior created by the imperfect intellectual property rights.