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

See all articles by Pradeep K. Chintagunta

Pradeep K. Chintagunta

University of Chicago

Marco Qin

Fox School of Business, Temple University

Maria Ana Vitorino

INSEAD; University of Minnesota - Carlson School of Management

Date Written: March 13, 2018

Abstract

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

Suggested Citation

Chintagunta, Pradeep K. and Qin, Marco and Vitorino, Maria Ana, Licensing and Price Competition in Tied-Goods Markets: An Application to the Single-Serve Coffee System Industry (March 13, 2018). Marketing Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2823221 or http://dx.doi.org/10.2139/ssrn.2823221

Pradeep K. Chintagunta

University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-8015 (Phone)
773-702-0458 (Fax)

Marco Qin

Fox School of Business, Temple University ( email )

Philadelphia, PA 19122
United States
215-204-6829 (Phone)

Maria Ana Vitorino (Contact Author)

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

HOME PAGE: http://www.maria-ana-vitorino.com/home.html

University of Minnesota - Carlson School of Management ( email )

3-150 Carlson School of Management
321 - 19th Avenue South
Minneapolis, MN 55455
United States

HOME PAGE: http://www.maria-ana-vitorino.com/home.html

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