Strategic Licensing and Market Power in Intangible Capital Markets

Patents grant inventors temporary exclusive rights over their technologies in exchange for disclosure, thereby encouraging innovation and knowledge diffusion. The conventional view holds that innovation thrives when firms compete for these patent rents and benefit from technology spillovers. Yet, the same exclusivity can also suppress innovation if holders of foundational patents use them to block or delay follow-on developments—resulting in technological “hold-ups” and costly litigation. Although patent licensing theoretically alleviates such inefficiencies by allowing access to protected technologies, little empirical evidence exists on how licensing transactions reshape market power in the market for intangible capital. This project investigates how patent licensing affects competition and innovation incentives. Using transaction-level data on patent licenses, I test whether licensing serves not merely as a channel for technology transfer but also as a strategic tool to deter rivals’ innovation. Specifically, I hypothesize that licensors strategically license more frequently, or at lower royalty rates, to firms that pose greater competitive threats—thereby discouraging these potential entrants from developing competing technologies and locking them into dependent innovation paths. Such behavior reflects a subtle but potent form of market power operating through control of core intellectual property. To test this mechanism, I will construct a novel dataset combining detailed information on patent licensing contracts (licensors, licensees, royalty terms) with firm-level data on financials, patent portfolios, and R&D outcomes. The empirical analysis will assess whether licensing intensity and pricing vary systematically with indicators of competitive threat—such as technological overlap, product-market proximity, or entry potential. Finding that licensors grant more favorable licensing terms to close competitors would provide evidence consistent with strategic deterrence models of innovation. The project proceeds in three stages. First, I estimate the elasticity of licensing activity and royalty rates with respect to competition metrics. Second, I attempt to establish causality through an identification strategy using plausibly exogenous variation in competitive threats. Finally, I will analyze post-transaction outcomes on licensor-licensee pairs to assess the broader implications for corporate innovation and firm value. This research offers the first large-scale empirical evidence on strategic licensing as a source of market power in intangible assets. The findings will contribute to the academic literatures on industrial organization, innovation economics, and finance, and inform policy debates on antitrust and intellectual property governance in the knowledge economy.