ECON 6555 Homework 4 Due Date: Thursday, February 26

ECON 6555 Homework 4 Due Date: Thursday, February 26 (at the beginning of class)

This assignment includes a series of economic problems related to demand curves, firm competition, patent licensing, and technology adoption models. Students are expected to analyze scenarios involving Cournot competition, monopoly and perfect competition, licensing agreements, innovation incentives, and adoption dynamics using both central source and epidemic models. The questions explore determining optimal royalty rates, profits under various market structures, incentives for process innovations, and modeling technology adoption over time.

Paper For Above instruction

The set of problems provided for ECON 6555 encompasses multiple core topics in industrial organization and innovation economics. These problems demand analytical reasoning, mathematical calculations, and graphical illustrations to understand market behavior, licensing strategies, and technology diffusion processes.

Demand and Licensing Strategies: Cournot Competition and Royalties

The first problem considers a demand curve p=100−2q, where a single patent-holder licenses rights to two manufacturers. The manufacturers choose quantities in Cournot fashion, each incurring a total cost of TC(q)=q². The goal is to determine the royalty rate that maximizes the patent holder's revenue and the fixed fee to charge each licensee. This problem involves deriving the equilibrium outputs, calculating the licensee profits, and setting royalty and fixed fees that optimize the patent holder’s payoff. The Cournot model implies that each firm chooses its quantity simultaneously, considering the other firm's quantity, leading to a system of best response functions. The patent holder's revenue depends on the royalty rate, which affects each licensee's profit-maximizing quantity. Optimal royalty rates balance profit extraction with market expansion, while fixed fees serve as upfront payments independent of sales. This analysis involves solving the second-order conditions for profit maximization and optimizing revenues under the strategic interaction of the licensees.

Market Competition, Patent Sharing, and Related Profits

The second problem addresses a scenario with two firms each owning a patent for perfect substitutes, facing a demand curve p=100−2q, with constant marginal costs at $20. Part (a) analyzes the profits arising under Cournot quantity competition, requiring calculation of the equilibrium quantities and profits considering the cost structure. Part (b) explores an illegal cross-licensing agreement where the firms share patents and set a common royalty to maximize joint profits, involving collaboration strategies. Part (c) involves illustrating the differences between the competitive and licensing outcomes on the demand curve, emphasizing how licensing can potentially increase profits and alter the competitive landscape.

Market Structure, Innovation Incentives, and Cost Savings

The third problem examines a demand curve p=100−q under monopoly and competitive markets with different marginal costs. Part (a) assesses the additional profit a monopolist obtains from developing a cost-saving process that reduces marginal cost from $80 to $20, including diagrammatic illustration. This evaluation involves calculating the difference in producer surplus and considering the innovation's incentive effects. Part (b) considers a competitive scenario where firms sell at marginal cost $80, and only the innovating firm with a patent benefits from reduced costs. The analysis compares incentives for innovation under monopoly versus perfect competition, emphasizing how market power influences technological progress.

Technology Adoption Models: Central Source and Epidemic

The fourth problem involves modeling the adoption of a new technology by N=21 potential adopters, with a parameter β=0.07. Part (a) uses a Central Source Model, where the initial adopter is fixed at D(0)=1, to compute adopters over time t=0 to 30. Part (b) employs an Epidemic Model with the same parameters, modeling peer-to-peer adoption, to estimate adopter counts over the same period. Part (c) compares the two models graphically, explaining which model predicts faster adoption and why, highlighting differences in diffusion mechanisms.

Pricing Strategies, Profits, and Market Penetration

The final problem concerns a new technology with demand p=100−q and a total cost TC(q)=500+40q. Part (a) seeks the profit-maximizing price, requiring calculating the monopoly's optimal quantity and price. Part (b) considers a penetration price set at marginal cost $40, analyzing resultant profits. Part (c) explores setting a zero price to maximize market share or social welfare, assessing the trade-offs involved. Diagrammatic illustrations aid in visualizing profit, market coverage, and cost structures under each pricing strategy.

Conclusion

The collection of problems provides a comprehensive exploration of strategic decision-making in markets with patents, monopolies, and innovation incentives, along with the diffusion dynamics of new technologies. Mastery of these topics requires familiarity with economic modeling, competitive analysis, and graphical representation. These analyses are essential for understanding how firms and patent holders optimize profits, encourage innovation, and influence market structures, with implications for policy and strategic business decisions.

References

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