Competition and the efficiency of markets for technology

The sale of ideas through licensing facilitates the division of labor between the separate activities of research and development. This vertical specialization can improve the overall efficiency of the innovative process. However, these gains depend on the timing of the sale: The buyer of an innovative project should assume development at the stage at which he has an efficiency advantage. Using data from the pharmaceutical industry, we show that competition between potential buyers is related to the timing of licensing. Furthermore, the effect differs by the type of competitor. We then describe a class of models that yields predictions consistent with these empirical patterns. Our key insight is that increased competition may increase licensing delays and hence inefficiency.