This paper analyzes the effect of licensing on the price collusion in the duopoly market and criticizes the proposition of Ping Lin's paper(1996) that licensing expands the possibility of price collusion at any market share. I modify Lin's model by introducing the 0th stage (stage of connivance at imitation) and the 1st stage(stage of licensing contract).
When the technological leader decides not to allow the follower to imitate the innovative technology, licensing doesn't necessarily expand the boundary of time discount rate in which the price collusion can be maintained. On the contrary licensing may contract the possibility of the price collusion.
Lin's necessary-sufficient condition comes under the necessary condition of the case without connivance at imitation and the 1st stage in the modified model. Nevertheless his conclusion is incorrect in the light of not considering the market share in the price collusion.
When the leader connives at follower's imitation, the boundary of time discount rate in which the price collusion can be maintained is expanded by licensing at any case. This implies that MNCs transfer their technology in order to avoid the price war expected in the entry into a new market.
