Entry-Deterrent Licensing Revisited

Consider a market with an incumbent and a potential entrant. The potential entrant owns an innovation so that it can produce more efficiently than the incumbent if it enters the market by starting a new firm. The potential entrant can license the innovation to the incumbent. The gain from licensing is higher if the potential entrant does not enter the market. It is possible that the potential entrant enters without licensing and does not enter with licensing. Licensing may reduce social welfare if it induces the potential entrant not to enter the market.