Patent Licensing and Strategic Shelving

In many markets, we observe scenarios where a firm sometimes pays to acquire a new technology (e.g., a patent), but does not use the technology for its own use: The firm "shelves" the technology. By acquiring but shelving the technology, the firm can prevent its competitor from using it and thus maintain its strategic advantage in the market. This may create market dominance. We show that this can happen when an outside innovator uses exclusive licensing to transfer technology where potential licensees have different efficiency levels of production and have asymmetric absorptive capacities for the transferred technology. However, we also show when this will not happen. We find that under fixed-fee licensing, when the size of the innovation is not large, the technology is shelved; whereas if the innovation is large, it is not shelved. With per-unit royalty licensing, we find interesting non-monotonicity with respect to shelving and no shelving as the size of the innovation increases. We also determine the optimal licensing contract for the innovator in this environment and the potential social welfare loss that is due to shelving.