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Bilateral Models of Cross-Licensing for Smart Products
Abstract
Motivated by the new practice of cross-licensing and price competition in smart products, as well as the lack of cross-licensing literature, this article develops a theoretical framework to investigate the incentive for bilateral cross-licensing between two competing firms with asymmetric bargaining power under price competition in smart products. In this article, one firm possesses quality-improving innovation, and another offers cost-reducing innovation for smart products. We find regardless of cost-reducing innovation scale, when the production cost of a holder of quality-improving technology is high enough, the competing firms have the motivation to cross-licensing; compared with a quantity competition, cross-licensing in price competition draws a higher price and producer surplus, but lower consumer surplus and poorer social welfare. This is an interesting finding for the discussion over whether a Bertrand price competition is more efficient than a Cournot quantity competition; and price competition, plus the stability of tacit collusion in cross-licensing, requires that participants have moderate bargaining power. Our article provides a potential explanation for the use of cross-licensing in the smart product industry with price competition, as well as management insights for decision makers by considering different effects elicited by cross-licensing of the smart products.
... For instance, Nakano (2020) revisited the product development of the Japanese electrical industry during the post-World War II from the strategic perspective of reducing licensing costs and found that Japanese electronics manufacturers cross-licensed their patented technologies in many cases to offset licensing fees and reduce costs. If the levels of cross-licensed technologies are significantly different, financial compensations are naturally necessary (Zhao, 2017;Zhao et al., 2021). For example, Zhao et al. (2021) reported on the emerging practice of cross-licensing and price competition in smart products as well as the lack of cross-licensing literature. ...
... If the levels of cross-licensed technologies are significantly different, financial compensations are naturally necessary (Zhao, 2017;Zhao et al., 2021). For example, Zhao et al. (2021) reported on the emerging practice of cross-licensing and price competition in smart products as well as the lack of cross-licensing literature. The effects of the competition model on firm profits, consumer surplus, and social welfare were studied under the incentive of cross-licensing in smart products. ...
... which is often adopted in the literature (see, e.g., Baron et al., 2016;Ye et al., 2019;Sen et al., 2021;Zhao et al., 2021;Li and Li, 2022). Here, θ and 1 − θ denote the relative bargaining powers of firms 1 and 2, respectively. ...
Green finance contributes significantly to the openness and transparency of carbon quota trading prices, which is conducive to the development of green technology innovation. With known carbon quota trading prices, we construct game-based operational research models to analyze fixed-fee and mixed-fee cross-licensing strategies for green technologies between two competing firms under the cap-and-trade policy. We compare the equilibrium outcomes of no-licensing, fixed-fee, and mixed-fee cross-licensing strategies. The findings reveal that product pricing under the fixed-fee cross-licensing strategy is beneficial to consumers. The mixed-fee cross-licensing strategy is optimal in terms of firms' total profits. When the degree of product substitutions is large and the improvement in carbon emissions is small, firms are more inclined to the no-licensing strategy. We further introduce the revenue-sharing contract, which can extend the Pareto improvement domain and improve the performance of green technology cross-licensing strategies.
... With technological trajectory, social networks, and industries as newly introduced keywords, it links to policy, strategy, ecosystem, and investment themes across quadrants. Researchers extensively used patent data for technological vacancy identification [86], comparing licensing strategies and their implications [87], [88], evaluating commercialization strategies by technology transfer offices [89], identification of new technology by technology convergence networks [90], and development of technology selection framework for new technologies [91]. Measurement of the moderating effect of patents on technological evolution [92], development of a theoretical framework explaining the coevolution between consequential problems and problem-solving as a source of innovation under technological uncertainty [93], and a unique regression-based patent data analysis approach for technology evaluation [94] using patent data became another research area. ...
... Patent, a product innovation cluster subset in period II, emerges as an independent cluster and links with policy, strategy, ecosystem, and investment keywords across themes. Nearly all areas of strategic MoT were addressed using patent analysis as a tool [87], [88], [89], [90], [91], [92], [93], [94]. This is representative of the growing acclaim of patent analysis to guide technology-related decisions, and its presence in the motor quadrant is evident that it is a hot research area in the MoT discipline. ...
Over the last five decades, the Management of Technology (MoT) discipline has advanced through various phases, with a differing scholarly and academic focus. It is quintessential to comprehensively trace the research trends in the MoT discipline to understand its developmental journey. In this article, we study the research output distributed into three periods. Employing science mapping on a portfolio of 1866 articles and a full-text review of selected 91 articles, focal shift, and the developmental trends of the MoT discipline were revealed. We found the ascent of policy, aspects dealing with alliance formation, and the emergence of strategic MoT and intellectual property as the focal developmental shifts. The topics addressed in the 2011–2022 period represent contemporary hot research topics, such as decision-making tools required, their development and applications, capability development and acquisition, managing technological change, and the strategic aspects of the MoT discipline. The topics, particularly those in the emerging phase such as open innovation challenges, development of an ecosystem, and strategic aspects in the MoT discipline, will lead the development of the MoT discipline in the near future.
... How-163 ever, to whom a company grants licenses, remains a strategic management decision 164 and is not subject to regulation. Consequently, it is obvious that competitors in partic-165 ular grant only few licenses to one another, and if they do, then in the context of cross-166 licensing, in which both or several companies gain access to a pool of patents [19][20][21][22]. 167 ...
In recent years, the relevance of communication technology has steadily been increasing. This technology is represented by technical standards as a means for faster technology diffusion and regulation. In turn, they are supported by standard-essential patents (SEPs) that protect inventions related to the standard and can be licensed as a pool. However, there is no standard-essentiality check, which induces patent applicants to declare either too many or too few patents as standard-essential. In this study we address the latter deficiency and define a new patent strategy, namely the watchful waiting strategy. Here, patent applicants file patents that are very similar to SEPs without subsequently declaring them standard-essential. We use topic modeling and deep learning to assess SEPs and non-standard-essential patents of 5G technology for standard-essentiality. The results provide information on the type of applicants holding watchful waiting patents. This entails several implications for companies, patent attorneys, and researchers, as the process model presented for identifying watchful waiting patents reduces the risk of patent litigation for companies wishing to use the standard. At the same time, rethinking the current process of SEP declaration opens up new avenues for policy makers and standard-setting organizations.
... Additionally, higher product quality, denoted as (where subscript ∈ {1, 2} represents period 1 and 2, and superscript ∈ { , , } represents MT mode, AT mode, and PT mode), leads to higher consumer valuation. This relationship has been observed in studies such as Mehra and Saha (2018), , and Zhao et al. (2022). ...
... Technology licensing, which exists in many industries, such as the semiconductor industry [21], pharmaceuticals industry [22], and energy industry [23], [24], is one of the most important management methods to achieve organizational competitiveness [25], [26], [27], and an important form of technology transfer under the patent system [28], [29], [30]. One significant problem of licensing is examining the optimal licensing contract from the perspective of innovators and society. ...
Existing studies on technology licensing for quality-improving technology neglect the licensee's absorptive capacity or assume the complete absorption of technology for product quality. However, the licensee's absorptive capacity may significantly impact the benefit of technology licensing and has received extensive attention in practice and research. To address this gap, this study analyzes the optimal licensing strategy of vertically differentiated products by considering patentor's innovation capability and licensee's absorptive capacity, giving three types of licensing including fixed-fee licensing contact, per-unit royalty licensing, and two-part
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licensing. We find that not only the patentor's innovation capability but also the licensee's absorptive capacity can significantly influence the optimal licensing strategy. The patentor may prefer per-unit royalty licensing and two-part
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licensing to fixed-fee licensing. Moreover, technology licensing always benefits customers and society. Our work specifies the decision space for the patentor in evaluating the value of different licensing contracts and provides a new decision tool for choosing the optimal licensing strategy. We provide interesting management insights into understanding the optimal licensing strategy from the perspective of the patentor, customers, and society.
... Practitioners have coined the term "frenemies" to refer to organizations with which they collaborate and whose competition they fear. From a legal perspective, cross-licensing agreements help to overcome practical challenges by making it possible to grant competitors the right to use a smart product (or its functionality) in a controlled manner while at the same time shielding its use from other organizations (Zhao et al., 2021). Further, organizations that are considering exploiting a smart product should clarify its obvious benefits that can be accessible to multiple industry roles. ...
As physical products are increasingly augmented with digital technology, manufacturing firms have become part of the development of so-called smart products and smart services. As such, manufacturing firms are challenged by new market participants and ecosystem partners, particularly from the software development industry, and by the dynamic nature of business relationships. While the academic literature on the distinctive characteristics of ecosystems, particularly digital ecosystems, is rich, the effect of smart service ecosystems' emergence on the foundation of smart products remains uncertain. This study reports on case study research based on 47 semi-structured interviews with four companies that participate in an industrial smart service ecosystem. Taking an affordance-theoretic perspective, we uncover the antecedents of and the process of emergent smart service ecosystems. We find that smart service ecosystems have three socio-technical antecedents: a shared worldview, structural flexibility and integrity, and an architecture of participation. We explain the emergence of smart service ecosystems as the result of specialization in shared affordances and integration of idiosyncratic affordances into collective affordances. We derive seven propositions regarding the emergence of smart services, outline opportunities for further research, and present practical guidelines for manufacturing firms.
Cross‐licensing, which grants each party the right to produce products using the other's patents, is a prevalent strategy for information and communications technology (ICT) firms to improve product quality and respond to intense competition. This study focuses on the cross‐licensing choices of two competing ICT firms that engage in price competition with substitutable products of different quality levels. Using a game‐theoretical model, we find that each firm will have a higher (lower) profit as its competitor's product quality improves in a price‐sensitive (quality‐sensitive) market. Signing a cross‐licensing agreement is profitable for the two firms when their quality improvements are roughly symmetric or when customers are sensitive to the price difference but less sensitive to the quality difference. Furthermore, we examine the quality‐to‐price ratio, which reflects customer perceived value, and find that cross‐licensing may achieve a win–win–win situation for both firms and customers when there is no significant difference in quality improvements between the two firms or when the competition intensity is moderate. The rationale behind these results hinges on the integration of the quality improvement effect and the quality differentiation effect. The results explain the observations of ICT firms' cross‐licensing practices and provide managerial implications for ICT firms and policymakers.
The objective of our study is to capture the roles of product quality and network effects in the success and efficiency of network markets under strategic settings that defined in terms of market share as a strategic factor and profit as a financial indicator. The research paper shows that the efficiency of network markets depends heavily on the phase adjustment of competition models and the balance of network effects and product quality among enterprises. the network market is always efficient in price competition, but not true in quantity competition when the network effect difference is sufficiently large or/and the quality difference is relatively small, then network effects may play a perverse role in market efficiency. The main findings reveal that network effects do not always enhance the role of quality in market efficiency and market growth. The research outcomes point to high quality enterprises’ attitude toward compatibility with enterprises with large network effects. This research paper also offers insights on government intervention to correct the distorted impacts of sufficiently large network effects on the efficiency of network markets.
Technology licensing as a vital part of business behavior in many industries has drawn a fair amount of attention in industrial organization literature. Most existing literature on licensing decisions assumes that all firms engage in Cournot or Bertrand competition, while the type of mixed competition may affect the choice of the licensor. In this context, what decision will the licensor make faced with different mixed competitions? This paper studies the optimal technology licensing contract of a licensor firm engaging in different mixed competitions (Cournot-Bertrand or Bertrand-Cournot) with a potential licensee in a differentiated duopoly market considering one upstream firm (supplier) that provides key inputs. We find that if either the royalty or fixed-fee licensing is applied, the licensor favors royalty licensing under Bertrand-Cournot competition when the degree of substitution is small and prefers the fixed-fee licensing no matter under what kind of mixed competition as the degree of substitution increases. In the case of fixed-fee licensing, the result shows that the profits of licensors are the same under different types of mixed competition. Besides, fixed-fee licensing is not always the optimal choice for consumers, and they would prefer royalty licensing when the degree of substitution is very small.
This study considers licensing of a cost-reducing technology through bargaining between a technology-holding firm and its rival firm in a Cournot duopoly market. To consider the relative bargaining power of both firms, the asymmetric Nash bargaining solution is applied as our solution. Then, we specify the combinations of lump-sum fee and per-unit royalty that are realized through bargaining, and examine the effect on social welfare of the technology-holding firm’s bargaining power. The principal findings are as follows. Regardless of the technology-holding firm’s bargaining power, pure royalty licensing is carried out, and social welfare is non-increasing in its bargaining power. In our model, licensing through a take-it-or-leave-it offer, which is often assumed in the literature, is regarded as the case in which the technology-holding firm has full bargaining power. Thus, the result on social welfare implies that the take-it-or-leave-it offer licensing mechanism leads to the socially worst outcome.
We analyze the effect of downstream competition (or cooperation) in the presence of decentralized bargaining between two downstream firms and an upstream monopolist over a two-part tariff input price. The major findings are as follows: (i) the relationship between the profits of the upstream monopolist (resp. the downstream firms) and the intensity of competition is U-shaped (resp. inverted U-shaped), irrespective of the competition modes in the downstream product market; (ii) if the intensity of competition is sufficiently high, the downstream firms’ profits are higher under Bertrand competition, whereas if the intensity of competition is sufficiently low, the downstream firms’ profits are higher under Cournot competition; and (iii) a market under Cournot competition is more efficient than a market under Bertrand competition, in the sense that both consumer surplus and social welfare are higher in the case of the former.
The paper is concerned with the coordination of interaction between various types of consumers and a power company to manage electricity consumption by using the adverse selection model based on contract theory. There are several power companies competing in the electricity market according to the Bertrand model. A method is proposed for load curve optimization by different types of consumers and a power company. Moreover, the types of consumers are identified and distinguished. The utility functions constructed for them describe the real situation rather well, and allow the implementation of a system of incentives for load curve optimization (load shifting from a peak time of the day by bounded rational consumer). The prices in rates providing a separating equilibrium are determined.
We investigate the firms’ investment decisions in the presence of litigation over infringement and cross licensing as a way to settle. The model endogenously determines not only the timing of investments but also their capacities, the degree of overlap between the initial and the subsequent innovations, and the way the competitors resolve the dispute. It shows that the firms’ R&D competition in the burgeoning market is more likely to entail a lawsuit and distinctly differentiated products, while they easily agree on cross licensing to utilize each other’s works in the slow-growing market, leaving little difference between the products. From the perspective of public policy, it is clarified that the policy on patent scope cannot yield the first-best result in terms of the speed of innovation, and the welfare analysis shows that social welfare is higher when the conflict is settled via cross licensing. However, the weak protection on patent rights, which is shown to encourage cross licensing, does not always guarantee the highest level of social welfare since it weakens the leader’s bargaining power in the negotiation, leading to fewer advanced products with higher prices.
Patent intermediaries have gained importance as non-practicing entities in the innovation domain, buying innovations from an external provider and then licensing them to practicing firms. In this paper we analyze the competition between two identical incumbent firms and a patent intermediary for the acquisition and licensing of a cost-reducing innovation developed by an external innovator. We show that the outcome of the IP acquisition and licensing game critically depends on the degree of the cost-reducing innovation. Patent intermediaries win IP rights in patent markets if the innovation is incremental. They also win the IP rights when the innovation is moderate or radical, providing they have significant efficiency advantages over incumbent firms and the uncertainty about the degree of innovation is low. We also show that patent intermediaries serve to make markets more efficient. When the innovation is incremental or moderate, they help ensure a lower cost of production and a lower price for customers, and when the innovation is radical, they help increase the profits of the incumbent firms.This article is protected by copyright. All rights reserved.
: We show the effects of product differentiation and product market competition on technology licensing by an outside innovator. For a certain range of product differentiation, both the innovator and the society prefer royalty licensing compared to auction (or fixed-fee), irrespective of Cournot and Bertrand competition, if the number of potential licensees is sufficiently large. Hence, for such a range of product differentiation, neither the innovator nor the antitrust authority requires information about the type of product market competition in preferring the type of the licensing contract.
This article develops a framework to analyze the incentives to form a patent pool or engage in cross-licensing arrangements in the presence of uncertainty about the validity and coverage of patents that makes disputes inevitable. It analyzes the private incentives to litigate and compares them with the social incentives. It shows that pooling arrangements can have the effect of sheltering invalid patents from challenges. This result has an antitrust implication that patent pools should not be permitted until after patentees have challenged the validity of each other's patents if litigation costs are not too large. Copyright (2010) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
Technology innovators are faced with the question of whether to license an innovation to other firms, and if so, what type of license it should use. This question takes on paramount importance with information technology innovations that lead to new products and services that exhibit network effects. This paper explores the impact of network effects on the licensing choice. The literature suggests that without network effects, a royalty license is preferred by producer-innovators. We find that a fixed fee license is optimal with strong network effects. For less intense network effects, the optimal license uses a royalty rate, either alone or in combination with a fee. We further derive the terms of the optimal license and discuss the impact of the investment needed to replicate the innovation and the size of the potential market. Our results provide insights for licensing decisions in industries that exhibit network effects.
We study a three-stage, asymmetric duopoly game of R&D rivalry. The stages are: (1) development of an innovation; (2) fixed-fee licensing of the innovation; and (3) sale of the final product. We find that major innovations will not be licensed, but that equally efficient firms will tend to license minor innovations. For some innovations, licensing is both privately and socially undesirable. If at least one of the two producers would refuse to license (were it to acquire the innovation), then licensing will not occur; an excluding firm will obtain the innovation. The possibility of licensing may decrease the returns to innovation if the licensee appropriates most of the licensing gains to trade.
This study investigates the technology licensing decision of an incumbent patentor with quality-improving technology in duopoly model with heterogeneous consumers, and quality information disclosure strategies of the patentor and the licensee that compete in quantity. A patentor is faced with a dilemma whether to disclose product quality information to consumers when technology licensing occurs and whether to encourage the licensee to disclose its quality information. While few scholars study the quality information disclosure in the background of technology licensing, these problems are of importance for the technology licensing because the disclosure decision can significantly influence the consumer belief about product quality and generate different effects on patentor's profitability. We find that the patentor can benefit from choosing information disclosure strategies. Under per-unit royalty licensing, we show that the patentor may choose not to disclose its quality information but encourage the licensee to disclose quality information. However, we find, under fixed fee licensing, when the disclosure cost is sufficiently low and quality difference is not large, only a large prior probability of the product being of high-quality can motivate the choice that the patentor disclose information and require the licensee to disclose. Interestingly, our results also suggest that per-unit royalty licensing leads to more information disclosure and higher profits than fixed-fee licensing. Our work identifies the optimal conditions under which the patentor can deal with the dilemma in quality information disclosure, proposes decision support tools in evaluating the values of quality information disclosure, and provides new management insights in quality disclosure strategy under technology licensing.
During the contemporary studies on the measurement of the patent quality, two typical research circles gradually protruded. One research circle concerns on the detailed metrics and measuring methods on the patent quality, whose members could be mostly from public policy, governance, and so forth. Another research circle pays more attention on the relationships between firm's performance, technology capability, and patent count or quality. Sometimes, the research fruits from the first community occasionally fail to timely transmit to second research community; especially the possible effects of firm's patent quality on firm's market value under the context of technology management in China were much less mentioned during the past decades. In this article, an integrated or multidimensional metrics on the patent quality evaluation are utilized to reshape the analytical model, and the possible relationships between firm's value and firm's patent quality are further explored based on a quantitative means. In empirical analyses, two technology-intensive industries in China, i.e., China's telecommunication equipment industry and China's pharmaceutical industry are conducted for case studies. The selected industries are relatively competitive, and they are all technology intensive or patent intensive. Through the theoretical hypotheses designing, and regression analyses based on the unbalanced panel data, some interesting phenomenon and conclusions could be revealed.
This study examines the endogenous vertical structure in which each manufacturer sells its product to its exclusive retailer who sells network goods to consumers (i.e. a duopoly in the upstream market) under Bertrand competition and Cournot competition with network externalities. We show that with strong (weak) network externalities under Bertrand competition, (a) it is a dominant strategy for each manufacturer to integrate (separate) its retailer; (b) with strong network externalities, the manufacturers’ profits, consumers’ surplus and social welfare are higher under vertical integration than under vertical separation. Under Cournot competition, (a) vertical separation is a unique subgame perfect Nash equilibrium; (b) with strong network externalities, the manufacturers’ profits, consumers’ surplus and social welfare are higher under vertical separation than under vertical integration.
We examine the endogenous determination of a vertical market in an import‐competing market with import tariff. We show that if firms commit to vertical organization before the government's commitment to trade policy, the home and foreign firms choose vertical separation and vertical integration, respectively, at equilibrium under Bertrand competition. Under Cournot competition, the subgame perfect Nash equilibrium entails both firms separating their retailers. Comparing profits between Bertrand competition to Cournot competition, we find that upstream manufacturer's profit can be higher under Bertrand competition with integration than under Cournot competition with separation when comparing foreign upstream manufacturer's profit.
This paper analyzes optimal cross-licensing arrangements between incumbent firms in the presence of potential entrants. The optimal cross-licensing royalty rate trades off incentives to sustain a collusive outcome vis-a-vis incentives to deter entry with the threat of patent litigation. We show that a positive cross-licensing royalty rate, which would otherwise relax competition and sustain a collusive outcome, dulls incentives to litigate against entrants. Our analysis can shed light on the puzzling practice of royalty free cross-licensing arrangements between competing firms in the same industry as such arrangements enhance incentives to litigate against any potential entrants and can be used as entry-deterrence mechanism.
We analyze the competitive effects of bilateral cross‐licensing agreements in a setting with many competing firms. We show that firms can sustain the monopoly outcome if they can sign unconstrained bilateral cross‐licensing contracts. This result is robust to increasing the number of firms who can enter into a cross‐licensing agreement. We also investigate the scenario in which a cross‐licensing contract cannot involve the payment of a royalty by a licensee who decides ex post not to use the licensed technology. Finally, policy implications regarding the antitrust treatment of cross‐licensing agreements are derived.
en This study investigates the relationship between technologies that firms expect to achieve after cross‐licensing (CL) and their incentives for signing CL agreements in a multiproduct‐firm setting. Results indicate that if markets are bounded substantial technological improvements that result in removal of firms’ current products from the market may in fact reduce firms’ incentives to negotiate a CL deal. This may also give firms an incentive to agree upon a tacit collusion by which they limit the utilization of CL technologies. However, when markets are unbounded, the prospect of capturing new markets and charging royalty fees can significantly increase firms’ incentives for CL. The rationale behind our modeling assumptions is discussed using example from agriculture biotechnology industry.
Abstrait
fr Cette étude examine la relation entre les technologies pouvant être atteintes par les firmes suivant l'accord de licences réciproques, et les incitatifs pour encourager la signature de telles ententes dans le cadre de firmes multi‐productrices. Les résultats démontrent que si les marchés sont limités, les améliorations technologiques considérables qui résultent du retrait du marché de produits courants de la firme pourrait en effet réduire les incitatifs de cette dernière pour la négociation de licences réciproques. Les fondements qui sous‐tendent nos prévisions modélisées font l'objet d'une discussion au moyen d'un exemple de l'industrie agricole biotechnologique.
Most of the focus in the licensing literature has been on how firm and market characteristics affect licensing activity. However, in the field of management of technology licensing, there is also a need to understand within-firm heterogeneity in managing licensing activity beyond firm- and market-level approaches. Inventions originate in different parts of the firm [research and development (R&D) lab, business unit]. This heterogeneity requires strategic decisions about whether to enter the licensing market, and then, whether to put restrictions in the licensing contract (exclusivity clauses) if licensed. Using invention-level licensing data, this study analyzes when and how these inventions sourced from different parts of a firm participate in markets for technology. The results suggest that business unit inventions, compared with R&D inventions, are less likely to participate in the licensing market and more likely to include exclusivity clauses if licensed. The results add new empirical evidence for and also help advance the management of technology licensing. IEEE
This paper analyzes the benefits of information sharing in a closed-loop supply chain with a manufacturer, a distributor and a third party under technology licensing. The distributor has access to private market demand information and decides whether to share information with the manufacturer. We investigate three kinds of remanufacturing scenarios, namely (1) the manufacturer taking the responsibility for remanufacturing, (2) the manufacturer licensing the distributor to undertake remanufacturing, (3) the manufacturer licensing the third party to conduct remanufacturing. We adopt Stackelberg game to obtain equilibrium decisions of each remanufacturing scenario with/without information sharing. We show that, regardless of whether technology licensing exists in remanufacturing models, information sharing always results in a profit increase to the manufacturer and the third party, whilst a profit loss to the distributor. Such profit loss of the distributor can be effectively reduced with the introduction of technology licensing in each remanufacturing model. As for the remanufacturing choice, if the distributor/the third-party saving unit cost is high enough, the manufacturer would prefer distributor/third-party remanufacturing mode with information sharing instead of manufacturer-remanufacturing mode as he could share more remanufacturing benefits by charging a licensing fee from the distributor/the third party. Our study extends and complements prior research that has only examined remanufacturing mode combined with either technology licensing or information sharing.
Industry practice has shown that technology licensing has an important effect on the remanufacturing of patented products by third parties. Different licensing methods significantly impact a supply chain member's production and collection decisions, and they also have influential effects on reverse channel performance. However, there is scant literature investigating the decision on technology licensing and its impact on a supply chain member's production and collection decisions. To address this gap, we consider a manufacturer, as the patent holder, who produces new and remanufactured products and, simultaneously, he and a remanufacturer (as the licensee, who by law can only produce remanufactured products) competitively collects used products from the market in a two-period closed-loop supply chain (CLSC). We investigate two licensing patterns, fixed fee versus royalty, within the CLSC in a Cournot duopoly model. We find that royalty licensing is dominated by fixed fee licensing from the viewpoints of both the consumer surplus and environmental protection. Our result also shows that the manufacturer's optimal licensing strategy is determined by a threshold of the fixed fee: when the fixed fee is below a threshold, it is better for the manufacturer to use a royalty licensing, whereas fixed-fee licensing should be used when the fixed fee is higher than a threshold.
This paper explores a vertical product differentiation model with a licensing arrangement between a multinational firm with superior technology and a domestic firm with obsolete technology. We find that a subsidy provided by the domestic country's government to the domestic firm to assist with the licensing arrangement is welfare enhancing for the domestic country. Furthermore, both the multinational firm and the domestic country are better off under royalty than under fixed fee licensing. These findings stand in contrast to earlier results in the literature.
We consider a Cournot duopoly under general demand and cost functions, where an incumbent patentee has a cost reducing technology that it can license to its rival by using combinations of royalties and upfront fees (two-part tariffs). We show that for drastic technologies: (a) licensing occurs and both firms stay active if the cost function is superadditive and (b) licensing does not occur and the patentee monopolizes the market if the cost function is additive or subadditive. For non drastic technologies, licensing takes place provided the average efficiency gain from the cost reducing technology is higher than the marginal gain computed at the licensee’s reservation output. Optimal licensing policies have both royalties and fees for significantly superior technologies if the cost function is superadditive. By contrast, for additive and certain subadditive cost functions, optimal licensing policies have only royalties and no fees.
The ubiquitous availability of devices such as smartphones, tablets, and other portable devices enables the collection of massive amounts of distributed data from the daily lives of citizens. These types of emerging mobile networks can provide new forms of valuable information that are currently not available on this scale via any traditional data collection methods. In such networks, price competition is the most important factor among the participants (mobile devices, services organizers [SOs], and users), highly affecting their quality of experience. In this article, we first explain how a game theory model can depict social behavior, price competition, and the evolutionary relationship among devices, SOs, and users, and then provide insights to understand the price competition process of the participants in mobile networks. Finally, we outline several important open research directions.
This paper develops a duopoly model of vertical product differentiation where competing firms incur variable costs of quality development. These variable costs are interpreted as investment in human capital (Motta, 1993). Two regimes have been considered: (i) both firms undertaking quality development and (ii) one firm undertaking quality development while the other firm purchasing a superior foreign technology. Outcomes are compared between price competition (Bertrand) and quantity competition (Cournot). We find that the foreign firm can set a higher licensing fee in the case of price competition, and leap frogging can arise under quantity competition, but not under price competition.
I study the motivations for and implications of exclusive contracts, with an application to smartphones. Why would Apple choose to distribute its smartphone through only one carrier, and why would AT&T bid the most for exclusivity? I develop a model which shows that if upstream handset manufacturers face a relatively low price elasticity for their good compared to downstream wireless carriers, exclusive contracts can maximize their joint profits. An exclusive contract reduces price competition in the final good market but also increases returns to innovation for parties outside the contract, such as Google's Android. Different price elasticities among downstream firms due to network quality differences lead to different valuations of the exclusive contract. I estimate the relative elasticities of smartphone and carrier demand using simulation and MCMC methods on a detailed monthly dataset of consumer decisions over 2008-2010. Counterfactual simulations show the importance of recomputing the price equilibrium to understanding the observed market structure. Accounting for price effects, AT&T had the highest value of exclusivity with Apple, and was willing to compensate Apple 1B.
Innovation and the management of intellectual capital are playing an increasingly important role in competition in high-technology industries. To operate in markets where innovation is cumulative, such as in electronics and semiconductors, firms frequently need to engage in extensive licensing and cross-licensing. This need is amplified by recent increases in the strength of patent protection and by the more active licensing stance of intellectual property owners. A high-quality patent portfolio not only reflects the firm's inventive capacity, but may significantly increase its crosslicensing bargaining ability and reduce royalty payments. In addition, it may directly contribute to its product and process innovation.
We consider a duopoly model with a Cournot-type firm and a Bertrand-type firm. Both survive and the equilibrium is stable when there is sufficient product differentiation. With no differentiation, only the Cournot-type firm survives, and the outcome is perfectly competitive.
This paper studies the case where an outside patent holder licenses its vertical product innovation to two Cournot competitors. It is found that, under a fixed-fee contract, the patent holder prefers exclusive licensing. However, under a royalty or two‐part tariff contract, the patent holder favours non‐exclusive licensing. Moreover, in contrast to the standard argument by Kamien and Tauman, we show that, from the perspective of the patentee, royalty licensing can be superior to fixed‐fee licensing, if the degree of innovation is small. Two‐part tariff licensing generates a monopoly outcome in the final market and hence reduces both consumer surplus and social welfare, if the innovation is low.
In this paper, we develop a vertically differentiated duopoly model where a high-quality producer competes against a low-quality producer, a la Cournot competition. The high-quality firm has both a new technology and an obsolescent technology. After first deciding whether to license, the firm then chooses which of the two technologies to license. We show that, irrespective of the licensing contract, licensing the new technology is always superior to licensing the obsolescent technology. This finding poses a sharp contrast to the conventional wisdom.
This paper compares Cournot and Bertrand equilibria in a downstream differentiated duopoly in which the input price (wage) paid by each downstream firm is the outcome of a strategic bargain with its upstream supplier (labor union). We show that the standard result that Cournot equilibrium profits exceed those under Bertrand competition – when the differentiated duopoly game is played in imperfect substitutes – is reversible. Whether equilibrium profits are higher under Cournot or Bertrand competition is shown to depend upon the nature of the upstream agents’ preferences and on the distribution of bargaining power over the input price. We find that the standard result holds unless unions are both powerful and place considerable weight on the wage argument in their utility function.
This paper challenges the conventional wisdom that exclusive owners of an advanced technology are always better off when producing as a monopolist than when competing against another firm. Competition against a less-efficient firm weakens the power that a host country can exert on the incumbent in the form of its tariff policy. We show that this gives a motive for a monopolist to license its technology to another foreign firm. A host country gains more from increased competition if it can induce the foreign incumbent to transfer technology to the host country firm. We show that the host country can do so by tariff commitment. We also discuss the implications of bargaining under licensing and Bertrand competition in the product market. Hence, this paper qualifies and extends the recent work of Kabiraj and Marjit [Protecting consumers through protection: The role of tariff-induced technology transfer. European Economic Review 47, 113–124].
This paper studies and compares licensing by means of a fixed-fee and licensing by means of a royalty in a differentiated Cournot duopoly model where one of the firms has a cost-reducing innovation. It is found that licensing by means of a royalty may be superior to licensing by means of a fixed-fee from the viewpoint of the patent-holding firm. However, fixed-fee licensing is always preferred to royalty licensing by consumers.
We consider the case where the introduction of a new product requires the development of two distinct complementary technologies. A firm can seek to either develop both technologies, or one of them and engage in a cross licensing with another firm that has developed the complementary technology. We focus on the interdependence between the innovation race and the cross licensing game, i.e., how the potential continuation of the race affects the cross licensing terms and how the possibility of cross licensing affects the pace of the innovation race.
In a duopoly model where firms have private information about an uncertain linear demand, it is shown that if the goods are substitutes (not) to share information is a dominant strategy for each firm in Bertrand (Cournot) competition. If the goods are complements the result is reversed. Furthermore the following welfare results are obtained: 1.(i) With substitutes in Cournot competition the market outcome is never optimal with respect to information sharing but it may be optimal in Bertrand competition if the products are good substitutes. With complements the market outcome is always optimal.2.(ii) Bertrand competition is more efficient than Cournot competition.3.(iii) The private value of information to the firms is always positive but the social value of information is positive in Cournot and negative in Bertrand competition.
We examine the optimal licensing strategy of a research lab selling to firms who are product market competitors. We consider
an independent lab as well as a research joint venture. We show that (1) demands are interdependent and hence the standard
price mechanism is not the profit-maximizing licensing strategy; (2) the seller's incentives to develop the innovation may
be excessive; (3) the seller's incentives to disseminate the innovation typically are too low; (4) larger ventures are less
likely to develop the innovation, and more likely to restrict its dissemination in those cases where development occurs; and
(5) a downstream firm that is not a member of the research venture is worse off as a result of the innovation.
This article analyzes the duality of prices and quantities in a differentiated duopoly. It is shown that if firms can only make two types of binding contracts with consumers, the price contract and the quantity contract, it is a dominant strategy for each firm to choose the quantity (price) contract, provided the goods are substitutes (complements).
We study the licensing of a quality-improving innovation in a duopoly model with heterogeneous consumers. Firms compete in prices facing a logit demand framework. The innovator is an outsider to the market and sells licenses via up front fee (determined in an auction), royalty or their combination. We show that if the market is covered then irrespective of the magnitude of the innovation both firms acquire the new technology and pay positive royalty and zero up-front fee. The increase in social welfare due to the innovation is totally extracted by the innovator. For the uncovered market case we show that if the consumer heterogeneity is sufficiently high, then both firms become licensees. The licensees pay positive royalty and zero up-front fee-if the value of an outside alternative option is low-and both positive royalty and positive up-front fee -- if the value of the outside alternative option is high.
Häckner (2000, Journal of Economic Theory 93, 233–239) shows that in a differentiated oligopoly with more than two firms, prices may be higher under Bertrand competition than under Cournot competition, implying that the classical result of Singh and Vives (1984, Rand Journal of Economics, 15, 546–554) that Bertrand prices are always lower than Cournot prices is sensitive to the duopoly assumption. Häckner (2000, Journal of Economic Theory, 93, 233–239), however, leaves unanswered the important question of whether welfare may be lower under price competition. This note shows that in Häckner’s model both consumer surplus and total surplus are higher under price competition than under quantity competition, regardless of whether goods are substitutes or complements. Copyright Springer 2005
In this not we show that the results developed in Singh and Vives (1984) are sensitive to the duopoly assumtion (Rand Journal of Economics 15, 546-554). If there are more than two firms, prices may be higher under price competition than unde quantity competition. This will be the case if quality differences are large and goods are complements. If goods are substitutes, high-quality fims may earn higher profits unde price competion than under quantity competition. Hence, it is not evident which kind of competition is more efficient.
This paper compares Bertrand and Cournot equilibria in a differentiated duopoly with substitute goods and product R&D. I find that R&D expenditure, prices and firms’ net profits are always higher under quantity competition than under price competition. Furthermore, output, consumer surplus and total welfare are higher in the Bertrand equilibrium than in the Cournot equilibrium if either R&D spillovers are weak or products are sufficiently differentiated. If R&D spillovers are strong and products are not too differentiated, then output, consumer surplus and total welfare are lower in the Bertrand case than in the Cournot case. Thus a key finding of the paper is that there are circumstances where quantity competition can be more beneficial than price competition both for consumers and for firms.
In this paper two broad categories of organizing a cooperative R&D project are compared: a Research Joint Venture (RJV) and a Cross Licensing Agreement (CLA). In a non-deterministic R&D setting including asymmetric information, we show that an RJV is more efficient in providing incentives, it allows to capture existing synergies and facilitates the dissemination of the partners’ know-how, which is socially desirable. However, contrary to a CLA, an RJV faces the risk of opportunistic behavior by the partners regarding the provision of their know-how to the venture, which could lead a CLA to perform more efficiently and, in some cases, this organization turns out to be superior.
This paper hypothesizes that, when their products are imperfect substitutes, firms can promote collusion by cross-licensing their competing patents. Cross-licensing is shown to enhance the degree of collusion achieved in a repeated game by credibly introducing the threat of increased rivalry in the market for each firm's product. The paper then examines the consistency of the theory developed with the available evidence. Antitrust implications of the practice of cross-licensing of competing patents are discussed.
Unlike other types of licensing agreements, such as those with output restrictions, market division clauses, or output royalties, licensing contracts with only a fixed-fee have been perceived as having no anticompetitive consequences. This paper illustrates that fixed-fee licensing may facilitate collusion by enhancing the licensee's ability to credibly punish deviations from the collusive outcome on the part of the licenser. Antitrust implications of the result and potential ways of detecting collusion-motivated licenses are discussed. Copyright 1996 by Blackwell Publishing Ltd.
Two versions of a vertical product differentiation model, one with fixed and the other with variable costs of quality, are analyzed to study how the hypotheses of price versus quantity competition affect equilibrium solutions. Product differentiation arises under all the scenarios considered, contrasting previous findings of symmetric quality choices under Cournot behavior. However, to relax harsher market competition, firms differentiate more under Bertrand than under Cournot. A simple welfare measure also indicates that the economy is better-off when firms compete on prices-with fixed costs of quality, not only consumer but also producer surplus is higher under price competition. Copyright 1993 by Blackwell Publishing Ltd.