Effects of Compulsory Licensing on Social Welfare and R&D Incentives

I theoretically analyze the compulsory licensing of intellectual property, comparing it to the essential facilities doctrine. Using a simple model, the conditions under which the licensing would enhance the economic welfare are examined. I show that, unlike Gilbert and Shapiro(1996)’s claim, there exist compulsory licensing rules which not only prevent entry of inefficient producers, but also do not reduce firms’incentives for research and development in the long run. Such socially optimal licensing rules are shown to be closely related to the concept of the Baumol-Willig efficient component pricing rule. Nevertheless, it is also shown that if the firm owning intellectual property has the discretion to set a licensing fee, then compulsory licensing is not necessary from the social point of view since voluntary licensing occurs whenever licensing is socially desirable.