Inter-Competitor Licensing and Product Innovation

Journal of Marketing Research, Forthcoming

Posted: 21 Nov 2017 Last revised: 23 Aug 2018

See all articles by Baojun Jiang

Baojun Jiang

Washington University in Saint Louis - John M. Olin Business School

Hongyan Shi

Nanyang Technological University (NTU) - Division of Marketing and International Business

Date Written: February 6, 2018

Abstract

This paper studies how licensing of non-core technology between an incumbent and an entrant affects market competition and the entrant's optimal product quality. We show that a royalty licensing contract between the incumbent and the entrant will soften competition. More importantly, the effect of such licensing on the entrant’s optimal quality depends on whether the entrant’s core technology can significantly or only incrementally increase its quality over the incumbent’s product. The royalty contract will tend to increase the entrant’s optimal quality when the entrant’s core technology can allow for a significant quality improvement over the incumbent. By contrast, if the entrant’s technology can raise its product quality only incrementally over the incumbent’s product, the royalty licensing contract will tend to reduce the entrant’s optimal quality. A wide range of royalty contracts are mutually acceptable; the incumbent (entrant) can benefit from a licensing contract even when the entrant pays a total royalty fee that is lower (higher) than its alternative R&D cost. These results hold even when the incumbent endogenously chooses its royalty licensing fee. We show that our main results are robust to several alternative modeling assumptions, e.g., alternative game sequence, endogenous quality decision by the incumbent, and alternative licensing contract.

Keywords: Licensing, Royalty, Competition, Pricing, Quality, Competitive Strategy, Product Differentiation

Suggested Citation

Jiang, Baojun and Shi, Hongyan, Inter-Competitor Licensing and Product Innovation (February 6, 2018). Journal of Marketing Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3073675 or http://dx.doi.org/10.2139/ssrn.3073675

Baojun Jiang (Contact Author)

Washington University in Saint Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States
3149353315 (Phone)

HOME PAGE: http://apps.olin.wustl.edu/faculty/Jiang/

Hongyan Shi

Nanyang Technological University (NTU) - Division of Marketing and International Business ( email )

BLK S3-B1A-32
50 Nanyang Avenue
Singapore, Singapore 639798
Singapore

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