Application of the dynamic limit pricing model to the price of technology and international technology transfer

APPLICATION

OF THt

DYNAMIC

LIMIT PRICING

MODEL

TO THE PRICE OF TECHNOLOGY AND INTIIKNATIONAL

TI:CHNOLO(;1’

TRANSFER

Stephen I’. Mafce” University of Texas at Austin

This paper a new

examines

technology.

characteristics

of private

good in ihat.

model market

once created,

the innovator.

However.

second

parties

conflict

has

does

technology.

the

appropriability

of rapid potential become

problem

pure

innovators.

This qurstion technology

important considerations organization c In section statics

through

factor

are discussed II. the

two

of

strategy

is applied

properties

optimal regions

&skins’s

is applied (the

U.S.

Consider new

product.

innovative the product

a firm.

~LICII

production

component in which

as

OK(;ANIZATION a

multinational

process.

is embodied it inheres.

or

other

monopoly

rights

case for sales the erosion good

These

and

is an

dynamic product.

comparative

to international and

other

developing

PKICING

trade

developed

countries).

In

MODEL

corporation.

which

develops

innovation.

Assume

that

so that it cannot How should

most

(197 I) industrial

strategy

countries) and 3 technology importing region (the section IV. seven policy implications are explored. I. THE INDUSTRIAL

may be

;I new high technology price

This 1961).

to the

technology

of the innovatin g firm.

by

solution

in the static

high

by

on a new

( 1970). However,

I, in which

LLX

because

The social

a new

III. the model

exporting

and/or

of temporary

to pricing

of the

In srction

technology

life

(Arrow,

tcchnologics

by emulators goods.

its

the returns

SLI~II

was explored

in section

model

are explored.

between

thr

in the price

pricing

to privatize

by Johnson

following is a public

by the innovator.

problem

firms to create public

the

sale of the technology

on s&s

has been the assignment

international

upon

Technology

does not preclude

and

returns

entry

to successful

appropriability

LIE

it is difficult

of embodied

of

parties

“apl-‘ropriability”

by innovating

ultimately

for ;I firm which discovers builds

of technology.

the private

is low when

technologies

creation

here

its use by second

labeled

Investments because

price strategy

developed

the uncompensated

reduce

been

Appropriability low both

the optimal

The

be priced

separately

the nrw high technology

a the

from

product

The author is indebted to Ronald Jones, Rachel McCulloch, Sam Cox, and William A. Brock for comments on an earlier draft. They bear no responsibility for errors in this version. Research support from the National Science Foundation is gratefully acknowledged.

103

he priced’? Johnson

( 1970) showed

will charge the monopoly life of the trade the

publicly

secret.

Technicdl!,.

sanctiuncd

folluuing tliscus4on. Iii&

tccllnolog)~

that.

in the static

pr-ice for the duration thr

monopoly

the word

product.

“price”

coniponc‘nt

“price”

C‘onsidcr

refers

case. the innovating

uf the patent of the

product

to tlic cntirr

nuw the dynaniic

tccllnolog~

11rw

of tlir

firm

or for the cffcctivc price.

amount

pricin?

c!c,Ll;Ils

In the

paid for the

prol)lcm

for tliis

product. Thi: solution firm

to the d~~namic trcllnolo~~~ pricing prohlcm

iz equivalent

an impcrfectl~ its profit\

to that of 2 dominant

competitive

arc hi$i

of inrlucetl

in tlic short

market

to this

problem.

pricing

policy

tliat

rrsults

(;askins

balance

maximizes

the

thcsc

prcht’nt

market

short-run

price.

for ;I newly discuvcrrd model

that

1971,

for steps

omitted

present

value

V

of

v = .7 [p(t) -cl

follows, herr).

The

q LpCt).tl e

-rt

cntr-y in

slixc

i5 low hec;~tisc

profits

are lower.

( I97 I) has applii-cl control opposing value

forces

hut

tliror~~

2nd drtcrniine

of the firni’s

profit

to calculate

;I

stream.

the optimum

tcclinology.

I follow

of the profits

of ;m inns\ sting

1~). potential

firm charges ;I Iii@ price.

c;m hc nsccl. with minor moclification.

price trajcctor>, In the

il low

share is higher.

The

The xamc model

If the dominant

run, but its lonpirun

entl-1,. If it cliarfcs

the long-run

(I)

industry.

firm threatcncd

Gaskins’s

innovating from

firm

notation wishes

the new high

(SW his paper. to maximize

technology

the

product.


0 p(t)

price of tlir new product

q[p(t),tl

quantity

sold

bS the

firm

innovating

3s 2 function

of its

price and time

t

tinic

r

discount

c

constant

The cost terln

c inclutlcs

the IISCof the new product Tlii~ quantity tlemancl the

(2)

IlCM

Icss

the

old otitptlt

rate averqc

cost

both the production it2.g.. servicing

of

production

costs antI the costs 01‘ facilitating

co$ts of new computers).

131, the innuvatin b firm at any point which

is sold

by cniulators

who

cquals

x(t)

quantity

for the technology

of teclinolog~~ sold by emulilting

the world

successfully

t~cllllolu~~v: a’-

q[p(t,.tl = flp(t)l -u(t). world tlcmantl f[Pct,l

transfer.

and

firms.

copq

The demand aid

twice

C‘LIJ~C for the new product

differentiable

The

with

assumption

respect

is that

geographically,

discriminate

Assuming

further

i(t)

-;I

= k[pCt)

initial quantity

k

response

r,

limit price

the

hllit

th!

barJieJS

sophistication

protecting

the

In most x(0)

(price

at which

derivative.)

If the innovator

emLLlators

entry

(including

innovation

and

the

the

will

rate

by

patent

returns.

In short,

they

trchnology

sets

Both

the

sophisticated

of the

high

the

of eniLilators

ereCted

strength

new

(exit).

of entv

those (more

enter

wuuld copy

no firm

its timr

price.

(i)

ideas

are

and

deprnd

on

on

fimi),

the

to copy

~~JLIcJ

of trade the

of

depend

innovating

system

a price

excess

secrets

degree

in

of the

of the idea.’

cast’s, the innovating

= XO = 0. In the

new technologies, as to maximize

technology

tlenotcs

innovator’s

“appropriability”

the

LerO (i;) and

the

ones),

as the

p30

firm’s

limit

above

of

than simple

price-

prodLlct.

as:

innovating

).

tu their

not

IWW

price of the technology

by ernLl~atoJs

sell the

food

price

does

for the

to

attempt

the

leader

price

sold by emulators

for

ant1

(below)

sloping

coefficient

(A dot over il variable above

in output

x(O) = x0.

x0

to be downward

price

uniform

a

view the current

future price. WC can writ? the change

(3)

innovatinp

charges

that emulators

is assumed

to outptlt.’

the

but

f

case

xc>O.

of

firm is the sole supplier

simLiltaneous

The innovating

the present

discoveries

firm wishes

value of the future

or

initially

highly

so that

substitutible

to price the tccllnology

stream

of tecl~nology

rents

SO V:

-Jt

(4)

max V = J [p(t) - Cl [f(p) - xCt)le 0

dt,

‘Ronald Jones has suggested an important distinction between the demand curve for embodied and disembodied technologies. While do not consider disembodied technology sales in this paper, some One unusual feature is that, for many disembodied interesting properties of them are worth no!ing. technologies, each purchaser buys only one untt of the new discovery: in effect, he either has the new idea in toto or not at all. Thus, the highest point on the f schedule is generated by the purchaser valuing it the most, etc. An interesting case is the discovery of a new method of rearranging production which results in Hicks-neutral change in an industry with firms having identical and linearly homogeneous production

I

functions. While industry structure is indeterminate in ule will be offered by the largest firm in the industry, on. The implication for technology transfer (in which tion becomes a public good) is that large firms would 2

See Magee (1977~4

and

1977b)

for

this case, the highest point on the f demand schedthe next highest point by the second largest, and so the price of tie technology is falling as the inform* always purchase the technology before small firms.

development

corporations.

205

of

an

appropriability

theory

of

multinational

subject

to i(t)

is the control II=

(5)

- 61 and x(O) = x o: x(t) is the state variable

= k[p(t) variable.

Tlic lIamiltoni;m

[I.,(t)-cl

[f(p)-x

tllc integrantl

vat-iablc

of (4).-is tlic change

in H--equal

while tllc sccontl--r(t

1 times u(t I--c;iptureb Variable

emulator.

Thus.

technology. maximization alon:

argues niceting

is at

p

returns

conditions

for

concavity

~ -uaraitecs

cliffcrential

uf tliesc

eqnation~.

i‘qu:ltions

conditions

frum the (4)

is tlic

and

optimum

since one 3ssumcs woultl

s

fall

without

discovered

teclinolopy.

Some properties

and

131,the

salts

I is the relevant

to twu

trajcctog,

indicated

t~cllllolugy

;L price above

implausibly

would

lonprun

that sales of emulators

charge

derives

and A(t).

b(t)

iscc tlic price trajectory

b = 0 and ; = 0. Kcgion

firm

with respect path,

that tlicrc is a unique

?.

wlicre

of profits

an optimal

Al< is the price path that tllc innovating

its newly

on futiirc

and future

I). The

prohlcm

not,

entg

sales,

price of an additional

current

in I-?gure

and that the rational Trajectory

of present

shadow

necessary

smuotll

i‘unc

ordinar>

;I phase-plant Al.

tecllnology

tllrcc

that

all of the ncccssar> lint

emLllators

did

the

deniantl

siniiilt;mcous from

heavy

is between

of

il 97 1) shows

tlic initial

IlWCSWl")

tile effect

Tlie first tern--

from ctirrcnt

of H in (5 ).

Gaskins price

une

tu aV’?Ix(t).

L(t) is the implicit

the trade-off

since

and p(t)

is

1

in preslcnt value accruinp

technology

revenue.

problem

(t)le-rt+,(t)k[p(t)-PI

.d t) being tllc atljoint

with

for this control

of tllc

area for the

arc low initially.

the limit

price,

hound

5;

iflif

in region

firm slloultl follow of this solution

IV.

in pricing

arc’ explored

in tllr ncut section. II. THE PRICE OF TI:(‘IINOLOCY industrial

The considerations The results

yield that

follow

The Optimal

equation

model

for

(shifts)

the

an cl

pricing

in the perceived

appropriability of

tecllnolu~y.

demand

cun’c

.j

Price Path

The innovating toward

implications

;isstIiiii\ no gruwtli

for the new tcclinology A.

pricing

organization interestins

firm sl~oultl continually

the limit price along trajectory

3See Ireland (1972) and Gaskins

6.

cut the price for its tcchnolo~y

The rate of price reduction Al: in Figure

(1971)

for the gwth

is detennincd

I, Along this. the optimal

case.

206

by the

i,

path, thr price

t

x

207

will always pricing value the

be below

of future higher

instruments

profits

B.

(because

E

and lands

Market

The technology private

In

(the

i

such

as very sophisticated

Cola

formula).

long-run

profits

(1,- c)

for

and

>

of emulators)

sllo~~ld

price

the long-run

in quadrant

than is gained

above

by

the limit price

equilibrium

III, it should

Share of the Innovating

component

from it.

costs

monopolistic

Thus.

of 6. If the

raise its price

along

E.

so that neither

returns

production

firm

approaches

JE until it reaches

good,

of stimulation

run. The innovating

The Equilibrium

price.

Innovating firms that “overuse” the many 4 payments give up more in long-run profits than they

of emulators

overshoots

public

profit-maxitnizill~

in time always fives away more in the present

price.

to extract

until the output trajectory

at any point

short-run

gain in the short firm

the short-run

of technology

of new products

Firm ultimately

becomes

the innovatin g firm nor emulators this case. the limit price coincides

IWLIS

with

technologies. firms

with

for some sufficient

facing the innovator

the

c

line).

trade

For other

secrets

barriers

to

a pure

can appropriate equals ideas.

(e.~., the Coca

entry,

permanent

exist: 0.

The long-run

equilibrium

share of the innovating

firm in total technolo&y

sales 6 is given by:

(6)

Q=

k(p - c) /r - f ’ (I)) Cp- c) f(P)

calculated

at point

are no price

(7)

E where

changes).

P=(I,-c)f’(p)+f(p)---_.

;( = 0 (there

The equilibrium

is

no

entry)

level of emulator

and where

b = 0 (there

sales

is eiven by:

6

kc; - c)

4See United Nations Conference on Trade and Development territorial restrictions discussions of grant-back provisions, discrimination, tied purchases, and package licensing.

(UNCTAD) (1975% 1975h, 1975~) for on sales by licensees, market price

Notice

that in the case of an embodied

pure public long-run

good,

the long-run

emulator

sales equal

has no economic The pM

static the

initially.

the

the

at O’A in Figure

greater

i;

f(pA)

the

run

long

There

new

(including

possibly

increasingly when

technology an initial

of this hypothesis

The model develop usable

embodied) become

5These

from position

The

years

data are reported

output

in

i.e., if c=p,

First,

the model

concentrated

in industry

The empirical result.

The four-firm

is that industry

surgical.

A test

concentration

ratio

whose

Young and

dental

age was

product

product

while old product

to an

products.

average product

than for industries (26 percent).

structure finn)

concentration

implication

whose

products

age

industries instruments,

industries

include

and cut stone products.5 advantages

public

in a

monopoly

advantage;

by the innovating

decrease

optical.

to

empirical

good)?

question.

in transforming

produce

after p = p = c (i.e., after a pure

results

the competitive

a highly

for industries

research

raises a second

continue

I), and

level.

and semiconductors,

comparative form

solution

than does the static

supplies

monopoly

higher

until

(= O’A in Figure

for sellers of new high technology

years (34 percent)

pharmaceuticals,

shoes, luggage, cement,

thereafter

(and the price-following

The dynamic

will move

to thirty-nine

chemicals,

price prices

raised by this model.

the expected

in 1967 was significantly

include

pA

2. In

the innovator

fall with the average age of the industry’s

to twenty-five

from that of

monopoly

continually

no permanent

output

structure.

yields

was twenty-five

F.

questions

the limit price is reached. should

to

product

possesses

structure

competitive

concentration

medicinal

eq~~al

competitive

the industry

embodying

a

the innovator

in Figure

at the

model.

his price

and the industry

are two empirical

that

twelve

cuts

a price

if the innovator

then f(i) is the long-run

illustrated

In Figure 2, the innovator

charge

> f(pM).

be

is priced

In thr dynamic

of the high technology

solution.

f((p). In effect.

can

product

cut the price until it reaches

supply

implies

demand

case

new

1, and

is reached.

fringe)

continually

stops

dynamic

model,

life of the patent.

the limit price competitive

market

becomes

goes to zero, 9 = 0. since

fringe.

and

(1970)

for

which ultimately

role to play in the long run that is distinguishable

a firm in the competitive Johnson’s

technology

share of the innovator

From

the

product

Do innovating

inventions

the technological

209

the

component

(6), the innovator’s

in Magee (1977~1 and 1977b).

into

(in which

share

firms which commercially innovation

is

of price has of the market

:

d

/

-4

/

a t:

ol .

LX I? z

/

IL

/

‘0

210

eqLlals

ZCI’O at

innovating

p

=

in the production

Gaskins optimal

discount

have

lowering

of existing

high

However,

trajectory.

This

one

would

to

expect

goods

technology

because

considerations emulation)

price As a

entering Outsiclc

by of a

cost

of capital

to affect

technologies

but not

the price

element

is a pure

the

(the

r raises

salts.

from

surp:ising.

the reduced

that

is that lower

technology

emulators

is mildly

rate

the optimal

strategy

of future

prevent

result

Assume

monopoly

dependence

cause the discount

of the

future

rate to affect

rent

the price of

technologies.

segmented, have

the

market

national

implication

is that

multinational

may

lower

costs

of capital

segmentation

which

now returns.

slows

reflected profits

to

two

is

technologies

national

firms,

costs

supplier lives. namely important and, hence,

investment), -and firm. On both counts,

products. the

appropriability

barriers

to entry, barriers

one

with

This

paper

the

copying for

superior

does

not

of new

embodied

in which

consider

technologies

will be ignored.

%ee caves (1971, p. 8).

211

barrier

will be long-run

to entry ”

the innovator

capability),

technology

of

i.e., any factor to entry

is positive

(; - c > 0). This may be a “long-run (i.e..

the multi-

is a capital

short-run

a situation

markets) for which

of capital,

k in (3). The second

structure.

arc effectively capital

affecting

In this model, coefficient

by industry

patent less

D (which

considerations

entry.

for the innovator

consideration.

average

markets to many

lower than the average national

The first is “short-run”

emulator

possible

effective

the

With lower

K and

more

in a low response

inframarginal

than

capital access

firm will supply more high technology

1 turn technology

(with

is binding.

will undertake

the multinational

if national

corporations

it will price its technology

This

Large

2, 8. and for the

in the discount

in the pricing

in the as-yet-undiscovered

through

Another

made

for the cllange moves

dynamic

on entry

existing

A decrease

for

technology.

of the innovatin g firm since

firm

framework,

results for

raise the value to the innovator

innovating

investments

stream

share

statics

implications

? = 0 and F = f(p)).

its price

dynamic

rent.

that

long-run

rates

result.

do not also engage

Rates

falls. The reason

the

this

supports

generally goods. 6

manufactured

comparative

the equilibrium AI!

evidence corporations

trajectory

u > c (otherwise

present

qualitative

(197 I 1 reports

price

result.

The

of standardired

C. Lower Discount

path

c.

firms s~ich as multinational

or by very

a third

long

appropriability

by users than

is an

for

themselves. disembodied

I).

Speed of Emulator An increase

implies

more

Entry

in the

response

rapid entry.

equilibrium

However,

level of emulators /;.

firm

it is cxplsined

by the downward

price.

Even though Lake

provides

and pharmaceutical

logic

introduced

from

important

the

U.K.,

or not

the

firms

E.

Lower Limit Prices

the

limit

share.

When

its price

trajectory ?)

linear.

convex

trajectory

F.

in

has risen.

the prcscnt

its

value

price

c

the optimal when

below,

rises since

of

entry

in the

semi-

the transistor-transistor

components

industry

and

two

more

application the

in 1963.

from

the

of this model

innovating

increases response

U!,

firm

U.S.

An

is whether

for the right

a reduction

by earning

in

and lowers of’thr

to

‘?. The lowrr

firm and. hence.

for the innovator

the

cume

initial

F lowers

inorc short-run

its

is to raise

1). This result iplus increased

the demand

or when

9

advantage

shifts up in Figure

is guaranteed from

speed

goods.

decreases,

firm compensates

AI:

by lowering

By 1968, eight more firms had entered.

compensated

the long-run

(AI!

the

Japan.

the lower

c

k)

in the

price trajectory

For example,

entered. from

in the limit

decreased

of

in the empirical

entering

price,

is a redilctic-i:

competition

share

microelectric

had

the high technology

A decrease

long-run

industries.

three

consideration

produce

in the optimal

to the increased

examples

in the

mid- 1966. seven U.S. firms three

Clii:yher

is lower.

(1977)

conductor was

signals

and. hence. 3 higher long-run share of this result is counterintuitive. However.

shift

respond

the innovator’s

of the firm’s profits

S

At first glance,

I: the firm must

to price

in the Ion, cr run, there

sales

the innovating Figure

of emulators

9 and

for the new technology

limit

price

is

is low. The price

the value of future

profits.

The

profits.

Appropriability In the case in which

moderate

amounts

will be lost rapidly.

They

with high limit prices R

and

and lower their market

own

k.

of new technology

arc also more private

D investments, When

patent

technologies

(to

transactions);

is high, firms are reluctant

than those

lists the ways by which their

k

in the creation

develop

interest4

in creating

with low ones. Another firms attempt

i.e.. to develop protection avoid only

to increase schemes

sophisticated

212

the returns

leakages

than on it

new technologies

paper (Magee.

1977a)

the appropriability

which effectively

is insufficient

information

to invest more

since

and costly, which

technologies

firms

occur (simple

of

raise

6

retail

through ones arc

easy to copy); ability

avoid

opposed

that

that

sckenty-seven

durations of

the

allows

back”

licensing!.

In general.

firms

G.

Throu$lout assumed

to

technology

be

Assume

countries,

firm

price

(the

competitive countrics: of high identify

countries which

price.

(short

A more Under

is modeled

the

profit

reasonable

TI:C:HNOLO(;Y into

three

countries.

up

and

Assume

import

For labeling

demand purposes.

in (4) will be c&d

countries.

response

I.

the

U.S..

other

lhnt the innovating that

it fiices

3

all of their production Thus,

in (2). we can

of high technology

soods

to

of the same goods from other The

SLIIII

in the developing the innovating the

be a slio~ild

in the other developed

countries.

x with the exports

would

in Figure

regions:

located

exports

pricing

TRADE

the U.S. and fringe firms export developing

of

the current

emulators

corporation;

producers

is

price

to a lower

will shift

is a U.S. mtlltin;Ltional

to the

price)

approach

this is equivalent

is divided

of emulators current

the technology

of the limit

such ii mechanism.

that

to the developing is total

fringe

between

price trajectory

world

goods

goods.

of the expected

after observing

that

and the developing

countries,

equal

value

difference

with the U.S. mLiltination~ll’s

devrlopcd

behavior

the

and that both

the dcvcloping

technology

(i.e.. increasing

fringe of high technology

q

f.

schemes

present

However. learn

mechanisni.

leader)

technology

majority

srrangcments:

in appropriability

INTERNATIONAL

developed

that permit licensing

by the competitive

To the extent

that

than

treaty

in the othrr

in subsidiaries;

entry

k, then the optimal III.

patent

developed

to the

tomorrow’s

less rapidly.

coefficient

in all countries

to be respected

in countries

patents)

Mechanism

will soon

expectations

patent

international

rather

existing

(utility

cost.

in response

overstates

low appropri-

of technologies

the marginal

this paper.

emulators

rational enter

will invest until

and the limit price.

process. prictt

to the parent

equals the marginal

The Expectations

abroad

durations

(the

only

21 “grant

with

appropriable

patents);

Convention

subsidiaries

LIW

package

1, streams

(seventeen-year

Paris

invest

require

k)

short

in one country

in ubsidiarius:

~rnd loucring

with

discoveries

and

LISC

technologies

for the firm’s highly

instruments

countries);

ownership

of new

substitutes

Ifgal

to longer

ifrc members

convention

introduction

are close

technologies; as

withhold

which

of these countries

two flows for high

firm in the U.S. whose

“innovating

multinational”;

the

price-following

firms

in the other tlevclopetl

countrim

will be called tlw “frinc~e”;

and the trade

flow

f

countries

will hc called

to the clevclopinf

“tcdlnology

exports.” These

abstractions

the international are

the

akence

bctwcen

the

fringe

countries

import

countries

obtainrd

The

U.S.

held

41

ales

and

other

in the

U.S.

virtually

technolu~);

and

cl~~eloped

countrie\.

and

other

high tecllnology

the

for

the

foreign-llcld

of

“dominant patents

the

patents firm

trade

absence

of

;I

The dcveluping of developin=

granted

country”

obtainctl

features

of technology

: nationals

wurltl

to euuninc

unrealistic

:m reasunablc.

features

1 percent

candidate

of

of the new

Tlic

over

to 11s~’the model

-rile atlniittcdl~~

procrss.

all of their

just

is ;I logical percent

in or&r

transfer

of donicstic U.S.

comptitivv

;irc’ necessq

trchnolog)~

1970. 7

in

since

thr

in dcvelopiny

U.S.

countries

in lc)71.’

The the

term

dcvt4upc~l

trade.

and

thr

clevclupin concept.

one

of the

(UNCTAD,

able

in the

Code

and facilitating

into

for

simplicity,

the developin

in Figure

meanings First.

in discussions

internatioid

a political United

of Conduct

tcchnolog)

an economic

thm

Nations

Confcrencc

for Multinational

the international

between

transfer

term.

on Tracl~

Corporations of technology”

statement

of what is meant

curve

high

transfer.

Assume,

f

concerning

it is more

provisions

used

1975~. p. 6). This is not a very precise

by technology imports

is frequently

g countries

(UNCTAI))

Development

is that of “accderating

curvt‘

transfer

A very nchulous

For cxan~ple. and

tcctinology

7.9

of

tl:r

g countries

Thr analysis

the

dcmantl

is fixed hrrc

for

and corresponds

SLI,, -cTehts three

tcchnologq

to tllc den~and

analytically

distingtiisll-

technolo~~v through private markets. z. transfer technology transfer to the dcvclopin~ countries is cqcial to

long-run

term

the level of technolog), level of technology

that

exports

trade

at the limit

can be incrcasctl

price

i;. The only way that this

is through

policy-induced

tlecreascs

in the limit price. Second. hifh is still tlic

the ruts of technology

technology aho\~c

developing

exports the

limit

(i.e., exports price).

countric‘s

transfer

The current

f[p’“(tjl

is equal

in all situations

level of total

is tlctermined

to the current

flow of

in which the current technology

by the

price

exports

innovating

to

firm’s

‘C hCr,\L, (197511. p. 36).

%K;CT,ZD(1975a, p. 39). 9For

relaxation

of the assumption

that

the demand curve is filed,

214

see Caskins

(1971)

and Ireland

(1972).

current 0.

optimal

price

the innovating

p”(t).

For example.

multinational

if the current

will charge

qua1

to O’A in Figure

equals

OfA in Figure 4. The level of short-run

by an!’ policy its optimal

directed

a growth

in the growth

B.

Policies Affecting

the of

now

the

larger

technolog), dcv~loped national

Technology

country patent

developing

countries

is a code

technology

of

conduct

positive

facilitating and

the

liniitativc, practices

These

restrictive. field:

national

(UNCTAD.

1975~. p. 6).

considerations

a

terms.

strengthening

U.S. innovating

can

multinational

SubsidiLcd

multinationals

to encourage

(the

in a direction

rules

proposed

of technology.

UNCTAD.

aimed

rcgulat:)ry

a view transfer

conditions.

to

unreasonable,

that affect

and

the

primarily

at

of

accelerating prices

and

at fair

by

unfair

and curbing

business

the function

administrative

of

procedures

by examining

four policies

the “transfer

of technology.”

toward

the

transfer

or international technclogy

which

by

instrument

of technology and

and (b) to perform

be explored

of

inter-

The third

be: (a) to aim at the attainment

laws

The

politics

corporations:

with

costs of technology

The U.S. government

transfer

of an iiitrriiational could

of

and part

Order.

technology

belong)

by

countries

of technology, Economic

the

a set

market

international

in this

price trajectory.

Paris Convention

countries and.

formulated

goals

reasonable

of the

niultiiiatioi~al

or code of conduct certain

most

importers;

The main objectives

as an increase

that the rate of price

the dsveloped transfer

issues:

revision

to which

through

in an expansion

is defined

International

three

for the private

transfer

it to drop

ca~ises

along the optimal

between

New on

goveriinit’nti:

treaty

transfer

This means

international

the

focusccl

technology

terms)

the

of

has

which

is increased

from OfA to OfF.

exports.

debate

over

discussion

exporters

transfer

Transfer

the policy

to

debate

favor

would

exports

(in absolute

countries

dcvclopinf

item

t?chiiolog]’

rate of high technology

turn

multinational

by the fringe)

technology

technology

in the rate of technology

1, must increase

I

by all high

e.g., from O’A to O’F. This results

flow of hi&

Third.

exports

at the innovating

price trajectory.

of the current

decline

3. Current

share of the fringe is

a price (also quoted

agencies exports.

?I5

could subsidize

In the model.

c

innovating cquals

the

t

x

-0

0

216

/

217

production

costs

the developing

of the new product

The U.S. govcrnmcnt miiltinationals countries

could

or proviclc

political

risks on their fore@

countries

ainong

One form

into

insurance

its discount

to U.S. firms for which

rate for tcclinuloy!,

this policy

In the model.

for certain

For example.

patent

rifllts

in siu developed

countrich

for clieinical

compensation

col-rcsponcls

to

;I

product.

cl. Keduced Some indefinitely licensing.

long-run

Package

licensing

standardized cstcncl price

technology

the

ccononiic

patent

lift.

i; salts,

more

in the

model.

I irefer to these

and exporter with

littlc

Italy ~s~ltdcs

uf

or

no

patcntabilit)

laws 011 cxistin, (’ tccl~nolo~ies

rapidly

to an increase develops

with ;I hipher

positive

mechanisms

with technology value

fur food

in two developed

in the inodel

monopoly

in

;I ncu

value of

k.

;L similar package

sales. In any case, both

of rc~lticin g tlicsr illc motlel

practices

718

streams

and package

of both old and new technolo-

involves

of 3 II:‘M’ technology Since

profit

sucl~ as tied purchases

is the sale of a bundle

Tlic effect

(If

C‘un~cntion).

power

basis. Tied purchases

goods

and

If a U.S. multinational

k.

~‘a11maintain

institutional

gics on an all-or-nothing

becatlsc

tcclinolog>

countries

producer

obtained

of patent

are cqtiivalent

market

firms

is a major

01

is the cxcltision

in five tlevclopetl

holder

frins-e cntcrs

innovating through

sanctioned

patent

iii their

to the hris

for pll;~rma~cuti~als. Italy

cnfurcelnent

cocfficicnt

the compctithe

an exception

cnforctmt~nt

i5 ;I desil-e for increased

firms countries

arc’ generally

from patentahilit!; rcsponsc

country

arc not cnforcctl

of the world

and Cxclttsions

(i.e..

formnlac

wcakrr

Tlicir motivation

by tlic il~vclopctl

cotlntrics

Wraker

favorctl

lonp

de\ eloped

substances.

wliosc

of pharmaceuticals. the emulator

countries. the

product5

products,

pliarma~~llti~uls

have

of response

patentability

limit

in tlcvcloping

In fact. the U.S. OVCI--

of patents

among tlic developed competition

exports.

can

to its innov;lting

in r.

The clcveloping price

trrms

This reduces the risk prcminm

investments.

it to

in c.

subsidiaries

the U.S. parent.

will iiicorporutc

c. Weaker ~nforccment patents

service

now provides

to the clcvelopin g countries.

rcdtiction

mixes

from

<‘orpoI-ation

the L:.S. multinational exports

to their

of ti-ansfcrrinF

to :I reduction

lend on cuncessionary

csporls

Invrstincnt

is equivalent

insurance

for technology

seas Pi-i\xte

ilb well 2s the cost

Thi5 policy

countries.

long beyond l>racticcs

deals

as “packaged

only

which

mechanisms its legall)

is to redtice with

tli?

embodied

sales” of tccllnoloyy.

Long-run patent

market

power

of the innovatin, 17multinational

lives were lcngthcned

(in the limiting

would

legal cast, patents

be increased

if

co~tld be made to

last forever).

1 examine

In the next section. tcchnologp

trade generated

some paracloxical

1.

Reducing

current

the

level of technology

exports

patent

innovating

multinational

increase

current

technology

3. Consider increase

countries

level

rate,

trade

of high technology implications

cannot

toward

growth

effect

point.

change) firm’s

be

and

multinational

the technology. long-run change,

without

aware

reducing

advantage).

These exports.

the initial growth

reducing

in the competitive

fringe, the

technology

run share in technology of the

the current

transfer

imports;

the current

of

level

the

the

long-run

toward

219

trade

for which

and to countries to

rate. the speed of entry

of firms

share of the U.S. multinational is able to copy

countries, the

and sell

the larger IBM’s long-

countries. innovating

and, hence, share

countries

b) to high risk countries

fringe

to the developing

policies

price of technology

increases

market

structural

on technology

are higher

and

competitive

to the developing

exports four

important

rate of high technology

effect

is revised to increase

the long-run

faster

the

impact

firm applies a higher discount

will increase.

I.e.,

of

growth

a) to low-income

of technology

on technology

5. If the Paris Convention

also

sales

to the developing

rate of high technology

The initial

will be higher:

costs

tariffs

which the innovating

6. Any

exports

of a policy

(again. apart from the once-and-for-all

IBM’s computer

technology

trade. should

the innovating

the

of technology

the innovating

of transferring

be increased

of the previous

that have higher

price

power

reduces

countries.

and increasin g the firm’s

policymaker

of the parameter

exports

current

of high technology

apart from the impact

4. The

the

to developing

always lead to a reduced

high technology

reduces

packaged

exports

current

discount

policies

Conversely.

exports

lives and encouraging rrducc

market

and, hence,

countries.

three of the four policies

thr

long-run

exports

to the developing

(subsidizin, (J the firm’s costs

firm’s

three

mLlltinational’s

innovating

2. Lengthening

the

IMPLICATIONS

the price of existin g high technology

by the

that

for international

by these policies.

IV. SEVEN POLICY

increases

results

of the

increases dominant

multinational current

that

technology

multinational

in

clcvcloping

countries’

tecllnolo~~

tratle

concentration.

tcchnoloyy flows

costs

policies

by the fringe)

1 conclude Results cast,

current

long-run increases

high

industry or decreases

mLlltinationa1.

discolint

level of technology

rates.

on the long-run

exports

and increased

spcetl

level of technology

of

exports.

with the proof5 of these seven results. from a shift in the long-run

in the innovating

that

it faces

that

the reduction

the tlircat

ha\,e no effect

1 and 2 follow

reduction

a

the policy

the current

reduced

increased

greater

to the innovating

that increase

uf transfer.

with

of whether

of this technology

7. The three isuhsidiLed

In other words.

associated

This is true rcgartlless

the profitability

entry

imports.

arc

lower

a

long-run

multinational’s

limit

price.

of frinfe

cntrb

li>ss costly

market

Yhe economics

in the m~~ltinatiollal’s

The fir111 comprnsates

limit price.

long-run

long-run

behind

profit

stream

to the multinational

than

hy raisin, cv the current

In

the

power

first

nlcans

thii result

is

(5 - c) makes it was before.

price and making

more

short-run

profits. Thr

If patent

c‘asc.

forever. the

second

paradox

lives Lucerne

To discourage

multinational

technology

3

The impact of

dynamic

cffcct

the

the

that

firm

trajectory. countries.

4

upon

play

effect

shift

is the change

policy

innovating thereafter

change

in export

growth

along the optimal

trajectory.

3 that

shift

price

in Figure

3 (I illustrate

expands

from. rate.

say.

5

in Gaskins

parameters

on

demand

percent. of

c.

and

(197 1). I establish signed

f. We establish (f” = 0).

at 7 percent

at point r. k,

the rate of price

unambiguously exports

the case using a discrete

had been growing

The effects lished

Consider

trajectory

as well

stream. current

of policy

chanpcs

on technolog>

price

trajectory:

the

due to a different

-rate changes

the three policy

down example).

say. 110 units to 115 units per period

But. if exports slower

the optimal

profits

profit

is the effect optimal

of price decline

monopoly

in the rate of technology

firm’s

in result

the extreme

is increased

in the effects

and on the growth

of each

in the

earli

in tllis increased The result

differences

transfer

Consider

could

will share

its price

and

transfer.

wf the first.

to the developing

on the rate of technology exports

infinite,

cntl-ants

rctlu_rs

exports

liesults

is the convmc

from.

say. O’A to 0’1:

The level

of exports

in Figure 4 (OfA to OfF).

per year at A. they will grow at 3

F. i; on the optimal

price trajectory

here that the effects

decline

on the new optimal

as their

first the effect

of three

effect

on the

of each parameter

growth

are cstab-

of the policy

trajectory

can be

of technology

on fi, assuming

linear

Gaskins differential before

does

not

equations,

performing

providr

i(t)

a solution

and i(t)

comparative

statics

respect

say.

p T and

auxiliary

to time. wz have

parameters

on

bi

partial

We must

do so

P and x appear on the rightSimultaneous solution yields an equation

x ;. Choose

equation.

simultaneous

eqs. (8) and (9)).

since

hand side of each of these equations. determining, in to the

to his two

(1971,

the solution

When

thesr

b 1 and i 1. l‘lle effect

can be unambiguously

with the negative

equations

of changes

signed

real root

arc differentiated

with

iii three of the four

(djlT/dk

can go either

way):

aP* in-

dc

cl;); (9)

r

e lnt<

ac

an1 c(P*-V)

=

0

aP*

+m- ar

am ar

+ m2(p*-g

[

1

mt

c


.* (10)

(IPI cl p

=

111

z

>o

ap

rk < 0 The effects of each policy change on the growth m = 2f (p*) technology exports can also be signed since, with linear demand,

where

where that, these

y with

represents linear

results

warns

demand,

under

dp*/dc

have signs that

This establishes

“Caskins

the policy

consideration.

> 0, dp*/dr

are the reverse

results

(1971,

221

(197 1) established

> 0, and dp*/dp of those

results 3 and 4.

that these are short-term

Gaskins

p. 314).

of

< 0.”

in equations

All of

(8) - (10).

To clarify increases

current

c raises

b*.

price

possible

decline

technology

about

is slowed.

more

price,

profits

(SW section

in future

to

demand

Al:A 02,.

profits

the than

the

price

trajectory.

to

FEI-.

causes

Since the loiig-run

is fixed

by

a,

a decrease p*

the

price

But, (8) suggests

increased 1I.D).

Another

Notice

entrant

that output

developing

countl?j

share

long-run

in falls.

multinational

costs

Hence,

in Figure

the long-run

exports

of the

profits.

c.

Thus, the rate of

of tecllnolosy concern

in present

in

and, hence.

that thr reduction

to - 6 percent.

by Cl 1). the growth from

lowering

trajectory

and.

f.

the signs. consider the optimal

say, - 8 percent

5 emanates

its future

national

is

about

exports

i.e., it goes from.

Paradox

OI;*

confusion

(197 1 ) showed that this reduces

Gaskins

the multi-

it cuts today’s 3. a shift

from

of the fringe to fall from high technology

of tlic innovating

import

multinational

up.

Result “i ds,dr

6 emanates

from

G 0. d$‘dk > 0, and d?/dp

opposite long-run

of those

reported

teclinolob~~ demand

above

&skins’s > 0 (with for

p”.

(197 1) results linear demand). Result

7 follows

f(p) is fixed by the lonprun

222

that

cl$dc

<

0,

Tllrse

signs are the

from

the fact that

limit price.

REFERENCES Arrow,

K.J..

(1962).

Invention,” and Social Research, Cavrs,

Investment

D. (197 l),

Entry.” N.J.

of Resources

Limit

of Economic

(1977),

The

for

Economic Economic

Press.

Industrial

Economics

38: l-27.

Pricing:

Theory.

“Concentration

on Gaskins’

University

Corporations:

,” Economica.

“Dynamic

Journal

Comment

and the Allocation

N.J.: Princeton

(197 1). “International

R.E.

Ireland.

Welfare

New York, Princeton,

of Foreign Gaskins,

“Economic

in The Rate and Direction of Inventive Activity: Factors, A Report of the National Bureau of

Optimal

Pricing

and the Growth

Limit Pricing

under

Threat

of

Demand:

A

3: 306-32.

Model,”

of Market

Journal

of Economic

Theory.

5: 303-5. Johnson,

Harry

G.

(1970).

“Multinational

Oligopoly:

The

Corporation,

ed. C.P. Kindleberger,

Lake.

A.W. (1977). national coming

Magee,

S.P.

“Technology

Firms.”

Corporation,

Non-American

Paper

(1977a).

Multinational

4-5,

“Technology Debate,

Conference

at New

Robert and

The

the

by Multi-

Multinational

University,

and forth-

ed.

Appropriability

in The New International ed. J. Bhagwati,

International

Transfer

on

York

Hawkins,

the

International

Mass.: M.I.T. Press.

and Technology

the

1976.

volume.

Corporation,”

The North-South

at

and

in

Challenge.” Cambridge,

Creation read

November

in a proceedings

Corporations

Cambridge.

Theory Economic

of

the

Order:

Mass.: M.I.T. Press,

forthcoming. (197711). Cycle

and

“Multinational

Devrlopment.”

Corporations.

Journal

223

of World

the Trade

Industry

Technology

Law,

forthcoming.

United The

Nations Role

Conference of

the

Lheloping

Cottntrics.

NC’WYork:

United

(1975b).

in

Nations

the

(IlKCTAI))

Transfer

Ihctment

of

( 10752).

Technology

TD!H!AC.

Major Issues Arisin g from the Transfer

Countries.

New York:

United

( 1975~). United

New York: .United

United

and Devrlopment

System

tu

II ‘19.‘Rev. l_

Kations.

Drveloping

Technology.

on Trade

Patent

United

Nations

Document

of Technolog>~

to

I1 ‘IO/Rev.

2.

Transfer

of

TI)/B,‘AC.

Nations. An

International

Nations

Code

Document

Nations.

224

of

TD/B/C.

Conduct

on

h/AC

I,i2/Supp.

l/Rev.

1,