Environmental technology licensing with multi-product competition in a vertically differentiated duopoly

In many polluting industries, firms with high environmental quality (HEQ) products often license their new environmental technology to firms with low environmental quality (LEQ) products. After accepting the licensing arrangement, firms with LEQ products can produce both the HEQ and LEQ products and compete with the licensor. What type of licensing mode is optimal under such circumstance becomes an interesting question and warrants analysis. To analyze this issue, we construct a vertical product differentiation duopoly model with multi-product competition. The results show that two-part tariff licensing is always the optimal strategy for the licensor, and it is the optimal licensing strategy as well to improve the environment and social welfare only when the degree of product environmental quality differentiation is relatively high.