Discussion Paper No. 953

TECHNOLOGY TRANSFER
IN THE MARKET
WITH HETEROGENEOUS CONSUMERS

Shohei Yoshida
Cong Pan

December 2015

The Institute of Social and Economic Research
Osaka University
6-1 Mihogaoka, Ibaraki, Osaka 567-0047, Japan

Technology Transfer in the Market with
Heterogeneous Consumers∗
Shohei Yoshida†

Cong Pan‡

Graduate School of Economics, Osaka University
December 24, 2015

Abstract
The paper explains why some firms transfer their technology to competitors without directcompensation. We consider a Hotelling market where duopolists sell products with diﬀerent qualities. This market consists of heterogeneous consumers, comprising two groups interms of their valuations of product quality. We show that when consumers’ preferences
for product quality are suﬃciently heterogeneous, a high-quality firm benefits from qualityenhancing technology transfer without payment. Furthermore, we extend the model to acircular city with four firms and show that a firm can benefit from a technology transfer todirect competitors rather than to an indirect competitor.
Keywords: Technology transfer, Competitor collaboration, Consumer heterogeneity
JEL Classification Numbers: L24, L41, M21∗

We are especially grateful to Noriaki Matsushima for his valuable advice. We would also like to thankKeisuke Hattori, Akio Kawasaki, Tomomichi Mizuno, Yusuke Zennyo, the conference participants at theJapanese Economic Association (Niigata University), and the seminar participants at Kyoto University andOsaka University for their very useful comments. The second and corresponding author acknowledges thefinancial support from the Japan Society for the Promotion of Science (Pan, 15J05223). All remaining errors
are our own.
†
Address: Graduate School of Economics, Osaka University, 1-7 Machikaneyama, Toyonaka, Osaka 5600043, Japan. E-mail: pge031ys@student.econ.osaka-u.ac.jp‡
Corresponding author. Address: Graduate School of Economics, Osaka University, 1-7 Machikaneyama,
Toyonaka, Osaka 560-0043, Japan. E-mail: pge042pc@student.econ.osaka-u.ac.jp

1

1 Introduction
We often observe that firms form an alliance with their competitors. It has been widely recognized in the management literature that one of the most fundamental motivations of strategic
alliances is the transfer of technology or knowledge between partner firms.1 Although one
may think of licensing as a way to conduct a technology transfer, the management literatureshows that it is not always applicable because tacit technology is unverifiable and diﬃcult
to be licensed.2 Even for some explicit technologies, licensing is not applied, because themechanism is very complex and costly.3 To provide alliance partners access to these implicit or sophisticated technologies, an advanced firm may even conduct a transfer without
receiving direct compensation.4 This might be surprising from a common sense perspective
since non-compensated sharing of one’s patentable technology means a loss in advantagethat should be avoided even at a cost. However, some empirical works suggest that freetechnology transfer exists and is not a rare phenomenon in various industries.5
Our research questions are as follows: why some firms may transfer their technology tocompetitors without any payments, and how consumers’ characteristics aﬀect the incentive
for technology transfers. To this end, we first consider a Hotelling duopoly market whereinfirms have diﬀerent technologies in terms of both quality and eﬃciency. Each firm monopolizes a group of consumers with strong brand loyalty while competing for other consumers
between them. Thus, this market consists of a “duopoly submarket” and two “monopoly
submarkets.”61

Gomes-Casseres et al. (2006), for example, find that knowledge flows between alliance partners are greaterthan these between pairs of non-allied firms. See also Hamel (1991) and Mowery et al. (1996).
2
For further details of contractual diﬃculties in transferring tacit knowledge, see Mowery (1983, p. 354)
and Ghosh and Morita (2012).
3
Harhoﬀ et al. (2003) summarize many empirical works and cases wherein licensing is not chosen fortransferring explicit technology in some industries.
4
Other ways for carrying out these types of technology transfer are by organizational combinations suchas joint production or partial equity ownership. A joint venture is a good example (Kogut, 1988). Creane
and Konishi (2009) show numerous cases of joint production with technology transfer in the metallurgical,
automobile, and packaging industries.
5
Morita et al. (2010) investigate collaborations among firms and observe 88 cases wherein a firm transfers
its technology without direct compensation. Notably, 59% of the technology transfers occur between firms
without partial equity ownership, which shows that free technology transfer plays an important role.
6
Take the videogame software market as an example, where consumers have already bought gaming hard-2

Two key assumptions concerning heterogeneity in consumers’ preferences are made.
First, we assume that consumers can be segmented into groups, and each one shows a specificbrand preference. Second, we assume that these groups are heterogeneous in consumer’s valuation of product quality. Kamakura and Russell (1993) empirically show the rationality of
our assumptions. Regarding the first assumption, data analysis on the powder laundry detergent category in the US shows that some consumers have a pronounced preference forone brand and therefore develop strong brand loyalty, while others buy from several brands.
These consumers are then segmented into diﬀerent groups according to their heterogeneousbrand preferences. For our second assumption, Kamakura and Russell (1993) show that
consumer’s valuation of the same features of a brand can be heterogeneous among thesegroups.7
We show the following results. First, when consumers’ preferences for the product quality are suﬃciently heterogeneous, a technology advantaged firm benefits from transferring
its quality-enhancing technology to a technology inferior firm without direct compensation.
Second, a firm with low-cost technology cannot benefit from a cost-reducing technology
transfer. Furthermore, we extend the model to a circular city with four firms and four consumer groups and show that a firm can benefit from a quality-enhancing technology transfer
to direct competitors rather than to an indirect competitor.
The logic behind our first result is as follows. When the consumers in monopoly submarket of the firm with inferior technology (the technology recipient) valuate the quality
enhancement more than those in the duopoly submarket, the demand for this firm increases
more in the monopoly submarket than that in the duopoly submarket. This is clearly harmful
to the firm with superior technology since its market share declines in the duopoly submarket.
However, the technology recipient charges a higher price due to increased demand, which
benefits the technology advantaged firm by decreasing its rival’s demand in the duopoly subware. PlayStation or Xbox, for instance, belong to the monopoly submarket, and new consumers belong to the
duopoly submarket.
7
Needless to say, economists have also theoretically focused on the heterogeneity of consumer preference.
To see more theoretical studies with respect to how consumers heterogeneity aﬀects firms’ behaviors, refer to
Shaked and Sutton (1982) and Ishibashi and Matsushima (2009).

3

market. In the duopoly submarket, the latter (strategic) eﬀect from a price increase can dominate the former (direct) eﬀect from quality enhancement; hence, the technology recipient
loses share in the duopoly submarket under some conditions. Thus, the technology advantaged firm benefits from a technology transfer by obtaining more demand in the duopoly
submarket.
Our second result shows that the eﬀect on a firms’ profit is opposite whether qualityenhancing or cost-reducing technology is transferred. The intuition is straightforward. In
our first result, a technology transfer makes a rival to charge a higher price. If the technology advantaged firm instead transfers its technology which makes its rival more eﬃcient,
the technology recipient has an incentive to lower its price, which causes the technology
advantaged firm to lose market share in the duopoly submarket.
In contrast to the original model, the extended model allows us to analyze the following
question: whom should a technology advantaged firm transfer its quality-enhancing technology to? The intuition behind our third result parallels the first. In this model, every two
firms compete for a duopoly submarket, wherein each consumer group has a diﬀerent preference about product quality. When the firm with superior technology transfers its qualityenhancing technology to the direct competitor, the direct competitor expands its share, which
is negative for the technology advantaged firm. However, following our first result, the technology advantaged firm may obtain a higher demand from the higher price charged by thetechnology recipient, which can surpass the former negative eﬀect. In contrast, the technology transfer to an indirect competitor increases the technology recipient’s demand andprice, forcing direct competitors to adapt by undercutting prices. This always diminishes thetechnology advantaged firm’s profit.
Our study also has managerial implications for imitation deterrence and industry advertising strategies. First, the extent of tolerance toward rival’s imitation activity varies amongproduct properties. Our findings give a possible marketing strategy: a rival’s imitation of
product quality may be permitted or even encouraged. Second, from conventional wisdom,a firm should expect its advertisement to enhance consumers’ willingness to pay only for its

4

own product, rather than a rival’s in the same industry. Our results imply that this viewpoint
can have an opposite result: it can be profitable for a firm’s advertisement to help propagate
a rival’ products.
Several papers theoretically discuss the technology transfer among competitors.8 Creane
and Konishi (2009) discuss an asymmetric oligopoly with free entry and exit. An eﬃcientincumbent firm transfers its cost-reducing technology to another less eﬃcient one. In doing so, profits of alliance partners are enhanced by forcing exit. Matsushima and Ogawa(2012) discuss a location problem for multiproduct firms. Firms choose whether to disclose
cost-reducing technology. Only when the entrants are in the diﬀerent location with the incumbent firm can they use their know-how. The incumbent firm benefits from the transfer
by driving entrants to a diﬀerent location. Our study diﬀers from the above two studies
as we do not consider free entry or exit. Yoshida (2015) develops a multiproduct Cournot
model with a vertical structure and shows that an eﬃcient firm may have an incentive fora technology transfer without any payment to its competitor. Matsushima and Zhao (2015)
discuss a bilateral duopoly market wherein downstream firms have outside options when
Nash bargaining breaks down, and show that each upstream firm may voluntarily generatetechnological spillover to its rival. Rather than considering a quantity competition model,
we employ a price competition model without vertical relationship.9
This paper also relates to the literature that examines eﬀects of consumer heterogeneity
on market outcomes. We first became inspired by Desai (2001), whose market structure issimilar to ours: consumers are divided into two groups based on their valuations of eachfirm’s products, either high or low. That is, consumers are heterogeneous in terms of quality
valuations as well as taste preferences.10 We employ a modified version wherein each firm
8

The literature related to technology transfer without payment is sparse because most studies focus on how
to provide license to competitors or how to reduce counterfeiting under weak intellectual property rights (e.g.,
Qian, 2014).
9
Ghosh and Morita (2012) consider the technology transfer between firms with a partial equity ownership.
In their model, partial equity ownership is a necessary prerequisite for technology transfer. Milliou and Petrakis(2012) show that a vertically integrated firm can choose to fully disclose its knowledge to its downstream
rival. This technology transfer intensifies downstream competition but expands downstream market size, which
increases the wholesale revenue of the vertically integrated firm.
10
In addition, Tyagi (2004), Ellison (2005) and Shi et al. (2013) assume both vertical and horizontal heterogeneity. Ellison (2005) considers two consumer types for quality valuations, whereas Tyagi (2004) and Shi et5monopolizes a high-valuation consumer group (or consumers with strong brand loyalty).
Chen and Riordan (2007) discuss a similar model, which involves consumer heterogeneity.11
Their model has three relevant categories of consumers: (i) consumers whose first and second preferred brands are available; (ii) consumers whose first preferred brand is available,
whereas the second preferred one is not; (iii) consumers whose second preferred brand isavailable, whereas the first preferred one is not. Consumers in the duopoly (monopoly) submarket in our model may correspond to those in category (i) ((ii) or (iii)). Varian (1980)
also considers how the existence of heterogeneous consumer groups aﬀects firms’ pricing
strategies. In this model, heterogeneity comes from each consumer’s diﬀerent information.
We can also interpret that consumers in a monopoly submarket lack information about oneof these two firms. Therefore, we can apply our results to various market structures.
The rest of the paper is organized as follows: Section 2 sets up our model, Section 3
derives an equilibrium and analyzes the incentive for a technology transfer, Section 4 extends
our model and shows further results, and Section 5 oﬀers some concluding remarks.

2 A Simple Model
Consider a linear city along the interval [0, ∞), wherein consumers are uniformly distributedon [0, 1] with mass 1, while on (1, ∞) with mass M.12 Firm i (i = 0, 1) is located at i andselling a product of quality qi . Let pi denote the price of products of firm i.
[Figure 1 about here]
There are two groups of consumers, D and M. Consumers D are in a duopoly market
supplied by both (i.e., duopoly submarket). Consumers M are in a monopoly market suppliedal. (2013) consider continuous type.
11
Reggiani (2014) extends Chen and Riordan’s (2007) basic spokes structure to a spatial model wherein eachfirm decides its position on the spoke assigned by nature and discriminates consumers in price based on theirrespective spokes.
12
For simplicity, we assume that consumers in one of these two ranges are distributed infinitely. This assumption can be relaxed. Additionally, we assume asymmetric densities of the two submarkets. The derived
propositions about consumer heterogeneity are given, including terms of the relative size of these two submarkets. If we instead assume symmetric densities for these two ranges, and asymmetry in consumers’ transportation cost as in Desai (2001) and Pazgal et al. (2013), the conditions for our propositions can also be modified
in terms of heterogeneity in consumers’ tastes.

6

by only firm 1 (i.e., monopoly submarket). For simplicity, we analyze this asymmetric model
wherein only firm 1 has a monopoly submarket. We obtain qualitatively similar results if we
assume that each firm has a monopoly submarket. Furthermore, as shown in Section 4, while
diﬀerent submarkets are essential for our results, the monopoly submarket is not necessarily
needed.
Consumers buy up to one unit from one of the firms. Each group of consumers has diﬀerent preferences over product quality,13 which are represented by the diﬀerentiable functionsvD (q) and v M (q).14 It is natural that consumers’ willingness to pay should increase withproduct quality. However, v(q) here need not be strictly increasing in q.15 The utility of theconsumer located at x ∈ [0, 1] is given by,
k + vD (q0 ) − p0 − tx
if she buys from firm 0,
k + vD (q1 ) − p1 − t(1 − x) if she buys from firm 1,
U D (x) =  0
if she does not buy,(1)

where k is a suﬃciently large positive constant, but not too large to ensure interior solutions
for mathematical simplicity. The parameter t, the exogenous parameter of transport cost
incurred by the consumer, measures the substitutability between any given pair of products.
This formulation can be justified as follows: the product comprises several characteristics
and consumers are heterogeneous in evaluating one of these characteristics. It is along thatcharacteristic each firm diﬀerentiates its product. As for the other characteristics, consumers
are homogeneous and k is their common valuation (Belleflamme and Peitz, 2010, p. 224).
The utility of the consumer located at y ∈ (1, ∞) is given by{k + v M (q1 ) − p1 − t(y − 1) if she buys from firm 1,
U M (y) =0
if she does not buy.

(2)

Let x̂01 (p0 , p1 ) be the consumer who is indiﬀerent between buying from firm 0 and firm 1
and ŷ1 (p0 , p1 ) be the consumer who is indiﬀerent between buying from firm 1 and buying
13

In Tirole (1988, pp. 143-144), the consumer taste parameter can be denoted by the inverse of the “marginalutility of income.” Thus, consumers with diﬀerent incomes have varying willingness to pay.
14
We employ the model with consumer heterogeneity in terms of quality valuation. We would obtain essentially similar results with heterogeneous consumer groups in terms of price elasticity, as in Ellison (2005).
15
For example, young people expect smart phones with many functions. However, this is not the case forolder individuals.

7nothing. The values of x̂01 and ŷ1 are given as follows:x̂01 =

1 vD (q0 ) − vD (q1 ) + p1 − p0
+
,
2
2t

(3)

k + v M (q1 ) − p1
.
t

(4)

and
ŷ1 = 1 +Thus, the demand facing firm 0, D0 , and that facing firm 1, D1 , are given by
D0 =
and

1 vD (q0 ) − vD (q1 ) + p1 − p0
+
,
2
2t

)
(
)
1 vD (q1 ) − vD (q0 ) + p0 − p1
k + v M (q1 ) − p1
D1 =
+
+M
.
2
2t
t

(5)

(

(6)

Assume that the constant marginal cost of firm i is ci and that c0 is normalized to 0. Thus,
firm 0 has both high-quality and low-cost technology, which implies that the technologies arecorrelated. However, this assumption is not crucial for our results.16 The profits of firm i are
πi = (pi − ci )Di .

(7)

Hereafter, we restrict our attention to interior solutions. In our model, firm 1 gets profit
from both the duopoly and monopoly submarkets. It is possible that firm 1 still benefits fromabandoning the duopoly submarket, specializing in supplying only the monopoly submarket.
For example, when k is very large, firm 1 can benefit by setting such a price that consumers
in the duopoly submarket do not buy from firm 1 at all. To eliminate this case, we implicitly
assume that k is not too large. As we discuss in the next section, the conditions for our results
hold when an interior solution exists.
In this setting, firms engage in one-shot price competition. Note that decision making
related to a technology transfer is not included in the game. We analyze whether firms havean incentive for a technology transfer by comparative statics.

16

We do not have to explicitly assume which firm is a high-quality firm. Since a natural presumption is thata high-quality firm can transfer its technology to a low-quality one, it is natural to assume that q0 > q1 . If the
low-quality firm can transfer its technology to a high-quality one, we do not need this assumption.

8

3 Analysis
In this section, we go through firms’ optimization problems. Since the model is standard, we
briefly sketch the outline of the analysis. Each firm chooses its price pi so as to maximize its
own profit. After few line computations, we have the reaction functions,vD (q0 ) − vD (q1 ) + t + p1,
2
2M[k + v M (q1 ) + c1 ] + vD (q1 ) − vD (q0 ) + t + c1 + p0
R1 (p0 ) =.
2(1 + M)R0 (p1 ) =

(8)
(9)

Note that a direct eﬀect of an increase in q1 shifts firm 0’s reaction function downwards
and shifts firm 1’s reaction function upwards. The valuations for product quality v M and vD
strongly relate to the eﬀect on the firm 1’s reaction function.
Assuming that an interior solution exists, the equilibrium prices are(1 + 4M)[vD (q0 ) − vD (q1 )] + 2M[k + v M (q1 )] + (3 + 4M)t + (1 + 2M)c1, (10)
3 + 8MvD (q1 ) − vD (q0 ) + 4M[k + v M (q1 )] + 3t + 2(1 + 2M)c1=.
(11)
3 + 8Mp∗0 =p∗1

Equations (10) and (11) show that an increase in v M (q1 ) motivates firm 1 to raise its price tofurther exploit consumers in the monopoly submarket. firm 0 can benefit from this eﬀect due
to strategic complementarity.
The resulting firms’ profits are
π∗0 =
π∗1 =

{
}2
(1 + 4M)[vD (q0 ) − vD (q1 )] + 2M[k + v M (q1 )] + (3 + 4M)t + (1 + 2M)c12t(3 + 8M)2{}2
(1 + 2M) 4M[k + v M (q1 )] − vD (q0 ) + vD (q1 ) + 3t − (1 + 4M)c1
2t(3 + 8M)2.

, (12)(13)

We now turn to the central issue, namely the incentive for the technology transfer, which
enhances the quality of a rival firm without direct compensation. Consider that firm 0 cantransfer its quality-enhancing technology on product quality to firm 1, and that the transfer
maintains the eﬃciency level of firm 1. The following result is obtained.

9

Proposition 1 Firm 0 may have an incentive to transfer its quality-enhancing technology
without any payment. Formally,dπ∗0v′ (q1 )2M<.
> 0 ⇔ ′Ddq1
v M (q1 ) 1 + 4M
The intuition behind Proposition 1 is that a technology transfer has both direct and indirect eﬀects on a firm’s profit, and these eﬀects work in opposite directions. A technology
transfer enhances the quality of a rival firm, which directly reduces the demand for firm 0(see Equation (5)). Note that a technology transfer has a diﬀerent impact on quality valuation for each type of consumer. Under the proposition’s condition, consumers in a monopoly
submarket evaluate quality enhancement more than those do in the duopoly submarket. On
the other hand, firm 1 increases its price to adjust to the increased demand due to the direct
eﬀect. For firm 1’s demand from the duopoly submarket, the direct eﬀect from quality enhancement can be dominated by the indirect eﬀect from the price increase; hence, the overall
eﬀect of the transfer can reduce firm 1’s demand from the duopoly submarket. Thus, both
firm 0 and firm 1 benefit from a technology transfer by obtaining more demand.
Note that the left-hand side of the condition for Proposition 1 depends only on the derivatives of v M and vD . Thus, we can find a certain parameter set, that satisfies both the interior
solution condition and that of Proposition 1. This argument can be applied to the otherpropositions in this paper as well. In addition, it is noteworthy that the condition in Proposition 1 would relax when better technology makes firm 1 enjoy a quality enhancement while
undertaking higher cost, because rising cost further drives up firm 1’s price.
Now we turn to the next question: does a firm have an incentive to transfer its costreducing technology to its competitor?
Proposition 2 Firm 0 has no incentive to transfer its cost-reducing technology without any
payment. Formally, dπ∗0 /dc1 > 0.
The intuition behind the proposition is as follows. Transfers of quality-enhancing technology and cost-reducing technology have absolutely opposite eﬀects on firm 1’s pricing
strategy. The former increases firm 1’s price while the latter decreases it. When firm 1 low10

ers its marginal cost, firm 0 has to undercut its price; therefore, its profit decreases. Hence,firm 0 does not transfer cost-reducing technology to its rival.

4 Extension of the Model
Consider a model extended to a circular city model with four firms, as in a la Vickrey (1964)
and Salop (1979).17 Firm i ∈ {0, 1, 2, 3} is located at i/4 and is selling a product of quality
qi . Assuming that each firm produces at no cost, we only need discuss transfers of qualityenhancing technology. We also assume that a unit mass of consumers is uniformly distributedon a circle of circumference 1 and that consumers are categorized into four groups dependingon their locations. We now call consumers between firm i and i + 1, type i i + 1. Theirpreferences over a product’s quality are represented by function vi i+1 (q). The structure of
the extended model is depicted in Figure 2.
[Figure 2 about here]
The utility of the consumer located at x ∈ [i/4, (i + 1)/4) is
if she buys from firm i,
k + vi i+1 (qi ) − pi − td(x, 4i )



i+1
k
+
v
(q
)
−
p
−
td(x,
)
if
she buys from firm i + 1,
Ui i+1 (x) = i i+1 i+1
i+1
4


 0
if she does not buy,where d(x, i/4) is the distance between consumer x and firm i on the circle. When i + 1 = 4,
we replace 4 with 0.18
Let x̂i j (pi , p j ) be the consumer whose utility does not change, regardless of which firm ischosen. These arex̂01 (p0 , p1 ) =1 v01 (q0 ) − v01 (q1 ) + p1 − p0
3 v12 (q1 ) − v12 (q2 ) + p2 − p1+
, x̂12 (p1 , p2 ) = +
,
8
2t
8
2t
(14)

17

We can easily extend the model to more than four firms. However, analysis of a market with four firms isimportant because each firm has both direct and indirect competitors.
18
Consumers’ preferences are similar to those in Chen and Riordan (2007), wherein each consumer only
cares about two possible brands, in contrast to Salop (1979). Although we can employ the preferences of Salopmodel, we assume the Chen-Riordan type preference for simplicity. See Chen and Riordan (2007, p. 903) for
justification of these preferences.

11

x̂23 (p2 , p3 ) =5 v23 (q2 ) − v23 (q3 ) + p3 − p2
7 v30 (q3 ) − v30 (q0 ) + p0 − p3+
, x̂30 (p3 , p0 ) = +
.
8
2t
8
2t
(15)

Each firm simultaneously chooses its price pi to maximize its own profit. Define ∆i i+1 =vi i+1 (qi ) − vi i+1 (qi+1 ). Assuming that an interior solution exists, we obtain the equilibrium
prices as follows.
p∗0 =t 5(∆01 − ∆30 ) + ∆12 − ∆23t 5(∆12 − ∆01 ) + ∆23 − ∆30+, p∗1 = +
,
4
24
4
24

(16)

p∗2 =

t 5(∆30 − ∆23 ) + ∆01 − ∆12t 5(∆23 − ∆12 ) + ∆30 − ∆01+, p∗3 = +
.
4
24
4
24

(17)

After a few line computations, we obtain the equilibrium profit of firm i as follows.
π∗i =(p∗i )2.
t(18)

This leads us to the following proposition:
Proposition 3 (i) Firm 0 may have an incentive to transfer its quality-enhancing technology
to a direct competitor. Formally,dπ∗0v′ (q1 ) 1< .
> 0 ⇔ 01
dq1
v′12 (q1 ) 5(ii) Firm 0 has no incentive to transfer its quality-enhancing technology to an indirect competitor. Formally, dπ∗0 /dq2 < 0.
Because of its symmetry, note that this statement can be applied not only to firm 0 but
also to other firms. The proposition makes two claims. The first claim is more illuminating,stating that a firm may have an incentive to transfer technology to its “direct competitors.”
The intuition behind part (i) is similar to that of Proposition 1. When a technology transfer
increases the valuation of type 12 more than that of type 01, the increase in price can be solarge that firm 1’s demand from type 01 decreases. Since the prices of firms 2 and firm 3
decrease, firm 0’s demand from type 30 decreases. When the condition for the propositionis satisfied, the technology transfer allows firm 0 to expand its total demand and increase its
price and then get more profit.
12

The second claim says that firms have no incentive for a technology transfer to an “indirect competitor.” The technology transfer increases the demand of indirect competitor. The
indirect competitor increase its price, whereas the direct competitors undercut their prices.
This forces firm 0 to decrease its price, leading to a decreased profit.
Note that if the condition for claim (i) is satisfied, firm 2 does not have an incentive totransfer its technology to firm 1. Moreover, the condition for the technology transfer by firm
2 to firm 3 is independent of firm 1’s quality. Thus, a technology transfer does not trigger
another one.

5 Concluding Remarks
Our paper discusses competitor collaboration and shows some results contrary to the conventional wisdom that managers should protect their technologies from imitation. As discussed
in our basic model, an advantaged firm may help its rival with quality-enhancing technology
when there exist heterogeneous consumer groups who evaluate such quality enhancement
diﬀerently. Although technology makes a rival firm more competitive in product’ quality, it
aﬀects the rival’s pricing strategy as well. The technology advantaged firm can benefit fromsuch transfer by driving up the rival’s price to obtain a larger market share. From this result,
we further show that cost-reducing technology, which cuts down the technology recipient’s
price, should not be transferred.
We also discuss a circular model with four firms and resolve which rival would receive thetechnology. We show that a firm may benefit from transferring quality-enhancing technology
to its direct competitor by driving up the recipient’s price. A firm does not benefit fromtransferring its technology to an indirect competitor, because quality enhancement for theindirect competitor depresses the direct competitors’ prices, and create a disadvantage forthe technology advantaged firm.
Our model can distinguish the diﬀerent eﬀects of quality-enhancing and cost-reducing
types of a technology transfer. Most existing models (e.g., Matsushima and Ogawa (2012)
and Yoshida (2015)) can not distinguish these two types because both quality enhancement
13and cost reduction shift the technology recipient’s best response curve outwards, which enlarges its output while intensifying competition. Our price-setting model can distinguish theeﬀect of diﬀerent types of technology transfer. The quality-enhancing type increases thetechnology recipient’s price, whereas the cost-reducing one decreases it. We believe that thebenefit of our model can be applied to other market structures (e.g., Bertrand model).
Welfare analysis is not involved in this paper because it is not always suitable with aHotelling type demand. In our basic setting, enhanced quality increases consumers’ willingness to pay, attracting more of them to the monopoly submarket and increasing the surplusof consumers there. However, from the standpoint of the whole market, asymmetries in consumer type, population, product quality, and production cost make analyzing the tradeoﬀ
between losses and gains in our model mathematically diﬃcult to accomplish. Despite this,using a numerical simulation approach on the simplest case, wherein consumer’s valuationof product quality takes a linear form, v(q) = θq, we are able to make an approximate prediction that quality-enhancing technology transfer enhances both social welfare and consumer
surplus. However, the eﬀects on each consumer group are diﬀerent: the technology transfer
enhances consumer surplus in the monopoly submarket but harms the surplus in the duopoly
submarket.

14

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Journal, 117(7), 897-921.
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-

0

0

ﬁrm 0

1

x01

y1

ﬁrm 1

Type D Consumers

Type M Consumers

Figure 1: The market structure (linear)

x30

ﬁrm 3

ﬁrm 0

Type 01 Consumers

0

x01

3/4

x23

1/4

1/2

x12

ﬁrm 2
Figure 2: The market structure (circle)18

ﬁrm 1