License and entry decision for innovating firm in international duopoly under vertical differentiation

We investigate a choice of options for a foreign innovating firm to license its technology for producing the high quality good to a domestic incumbent firm or to enter the domestic market with or without license under vertical differentiation with convex cost functions. If cost functions are non-linear, the domestic market and the foreign market are not separated, and the results depend on the relative size of those markets. We consider product innovation as quality improvement of goods not process innovation such as cost-reducing. If the size of the foreign market is small, the foreign innovating firm chooses license with entry strategy, and if the foreign market is not small, it chooses license without entry strategy.