Licensing and Price Competition in Tied-Goods Markets: An Application to the Single-Serve Coffee System Industry
Marketing Science, Forthcoming
56 Pages Posted: 17 Aug 2016 Last revised: 17 Apr 2018
Date Written: March 13, 2018
We develop a structural model of demand and supply for tied-goods which we estimate using aggregate data from the single-serve coffee system industry. We use the parameter estimates to quantify the impact of licensing on equilibrium prices and profits for firms in the industry. In particular, we look at the decision to allow other firms to sell components (coffee pods) that are compatible with a firm’s primary good (coffee machines) by licensing the use of its patents. We solve for the counterfactual market equilibrium in which one of the market leaders enters a licensing agreement with one of the competitor brands; with the latter brand only selling compatible coffee pods and not the machines. We show the existence of a range of royalty rates under which firms could potentially reach a beneficial licensing agreement. In addition, we find that the relationship between the licensee’s profits and the royalty rate is not always decreasing. Finally, we find that, within the set of royalty rates in which licensing benefits both brands, the licensing agreement is associated with less price dispersion in the aftermarket (coffee pods), and with lower prices of the primary good (coffee machines) relative to the non-licensing scenario.
Keywords: tied goods, demand and supply estimation, licensing, single-serve coffee systems
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