License and Entry Decisions for a Firm with a Cost Advantage in an International Duopoly under Convex Cost Functions

We consider the following options for a foreign firm with a cost advantage: licensing its cost-reducing technology to a domestic incumbent firm under a fixed fee, or entering the domestic market with or without license under convex cost functions. Under such functions, the domestic and foreign markets are not separated, and the outcomes depend on the relative size of these markets. In a specific case with a linear demand function and a quadratic cost function, entry without a license is not the optimal strategy for the foreign firm with the cost advantage. If the ratio of the size of the foreign market to that of the domestic market is small, license with entry may be the optimal strategy. In contrast, if the ratio of the size of the foreign market to that of the domestic market is not small, or the cost advantage is significant, license without entry may be the optimal strategy.