Tariff induced licensing contracts, consumers' surplus and welfare

•This paper constructs a duopolistic trade model with technology transfer.•The optimal licensing strategy of the foreign firm can be influenced by a tariff.•There is a trade-off between a tariff and a royalty license in affecting the product price.•A tariff can induce fee licensing, maximizing both consumers' surplus and domestic welfare.•The paper contains a number of testable hypothesis for future statistical verification.

We construct a duopolistic trade model with technology transfer and consider two-part tariff licensing contracts. We show that a tariff on foreign products can influence the licensing strategy of the foreign firm. There is a trade-off between a tariff and a royalty license in affecting the product price. We show in particular that a tariff can be chosen so as to induce fee licensing and maximize both consumers' surplus and domestic welfare. This resolves the so-called conflict between these two objectives in respect of the choice of a tariff. The paper provides a number of testable hypothesis.