Cheng-Hau Peng

International Technology Transfer and Welfare

We investigate the welfare effect of international technology transfer in a quality model. A foreign innovator with a new quality product can license its innovation to the domestic firm(s) via a fixed fee. Findings show that the foreign innovator will license exclusively to the high‐quality firm under Bertrand competition, whereas it may exclusively license to the high‐quality firm, the low‐quality firm, or non‐exclusively to both firms under Cournot competition. Non‐exclusive licensing is necessarily welfare‐enhancing whereas exclusive licensing is welfare‐reducing if the quality of the new technology is not sufficiently superior to that of the domestic ones.

Welfare, Output Allocation and Price Discrimination in Input Markets

We analyze the price decision of an upstream monopolist who produces and sells an intermediate good to downstream markets where a backward-integrated chain store competes with many local retailers. It is shown that the upstream monopolist may charge a more efficient local retailer a lower input price under price discrimination. This finding is of interest as it goes against the standard conclusion in the input price discrimination literature. Moreover, contrary to the general findings in the literature in which input price discrimination is welfare-deteriorating, we find that input price discrimination improves social welfare if the positive output allocation efficiency effect outweighs the negative production efficiency effect. These results are robust even if the chain store is not backward integrated.

Discriminatory vs. uniform tariffs with international technology licensing

Abstract This paper introduces technology licensing between rival firms into a three-country model to examine how an international technology licensing may upset the welfare ranking between a discriminatory tariff policy and a uniform tariff policy. It is found that a discriminatory tariff policy is inferior to a uniform tariff policy in terms of the social welfare of the importing country or the welfare of the world as a whole if the cost disadvantage of the licensor firm is high. This result is robust even if the licensor firm can engage in R&D investment in the long-run.

Cost asymmetry and vertical product licensing

This paper investigates the optimal licensing contract for a product innovation in a vertically differentiated duopoly. The two firms have different marginal costs and the high-quality firm can license its technology on product quality to the low-quality firm. It is found that the optimal form of licensing contract depends on the relative marginal costs of the two firms. If the marginal cost of the high-quality firm is relatively high (low), fixed-fee licensing is superior (inferior) to royalty licensing from the viewpoint of the licensor. Surprisingly, consumers are worse off if the quality difference between the two firms is small. This result is in contrast to the received wisdom in the product licensing literature.

Production efficiency, input price discrimination, and social welfare

This paper re-examines the welfare implications of input price discrimination by considering the possibility of the structural change in the final goods market. When the marginal cost difference is moderate, price discrimination is more socially desirable as the upstream firm serves more downstream firms under price discrimination than uniform pricing. Surprisingly, when the marginal cost difference is sufficiently large, although the upstream monopolist serves more downstream firms and more outputs are produced under price discrimination than uniform pricing, the social welfare is lower under price discrimination. This result runs against those prevailing in the literature without market structural change.

Tariff and Quota Equivalence in Vertically Related Markets

This paper re-examines the issue of tariff and quota equivalence by introducing an upstream market into the Hwang and Mai (1988) model, and then allowing the two downstream firms to cross-haul within each others market. We assume the upstream monopolist can select either a two-part or a one-part tariff pricing strategy. It is found that if the upstream firm adopts a two-part (one-part) tariff pricing strategy, then the market price of the final good under a tariff will be higher (lower) than that under an equivalent quota; that is, the quota is set at the import level under the tariff regime. This result stands in stark contrast to the prior findings of both Hwang and Mai (1988) and Fung (1989). Moreover, if the quota rent is set as being equal to the tariff revenue, the social welfare under a tariff will necessarily be lower than that under an equivalent quota.

Tariffication and Welfare in a Differentiated Duopoly

Converting non‐tariff barriers such as quotas into tariffs has been referred to as tariffication and is one of the most important outcomes of the Uruguay Round. Due to the burgeoning trend of free trade agreements around the world, tariffication has also been popular among Asian economies. By utilising a duopoly model with heterogeneous products, this paper compares the efficiency of three tariffication schemes: a quota is converted into an import‐volume‐equivalent tariff, import‐price‐equivalent tariff or profit‐equivalent tariff. It is found that tariffication always increases the world welfare no matter which equivalent tariff is adopted by the domestic government. This result echoes the spirit of tariffication proposed by the WTO and explains why more and more countries are using tariffs instead of nontariff barriers. If we further assume that the quota rent equals the tariff revenue, the domestic welfare will also increase after tariffication. By contrast, the domestic firm’s profit can be higher or lower after tariffication, depending on the tariffication schemes. Finally, the foreign firm is always worse off.

Parallel trade with an endogenous market structure

This paper sets up a two‐country model in which there is one domestic manufacturer authorising its product to a distributor in the foreign country. The distributor can sell the product not only to its own market (i.e., the foreign market) but also back to the domestic market. The latter is called parallel trade (PT). The paper investigates the effects of PT on the profits of the manufacturer and social welfare if the domestic market structure is endogenously determined. It is found that PT should be encouraged rather than banned as it increases not only the profits of the manufacturer but also the welfare of both the domestic and the foreign countries.

Welfare Effects of Tariffication on Parallel Trade

WTO has long called for converting non-tariff barriers into tariffs. This is called tariffication. Utilizing a two-country model, this paper examines the welfare effect of tariffication on parallel trade. We also compare the R&D levels of the manufacturer before and after tariffication. It is found that tariffication is socially undesirable for the domestic country no matter whether the manufacturer adopts one-part or two-part tariff pricing. But the effects of pricing on the manufacturers R&D are very different. If the domestic manufacturer adopts two-part (one-part) tariff pricing, tariffication discourages (has no effect on) the R&D investment of the domestic manufacturer. This implies that domestic welfare worsens in the long run under two-part tariff pricing.