Choosing the partners in the licensing alliance

Abstract

I consider a situation in which the incumbent strategically adopts the licensing alliance, facing potential entrants. The queue of entrants consists of two firms, the ‘strong’ entrant and the ‘weak’ entrant, who differ in their productivities. The incumbent sets a licensing fee and offers it to the entrants. Each entrant decides whether or not to buy the licensing alliance. After the set of the licensing alliance is determined, they engage in the Cournot competition. I examine the optimal licensing fee, and show that the optimal licensing fee is to charge a discriminatory royalty to each licensee. I also examine the licensing policy on the partner(s): To whom should the licensor license its technology? By comparing the equilibrium expected payoffs for the licensor, I show that licensing to both entrants would be preferred to licensing to a single entrant. But, if the licensor faces the problem on choosing the partner, he prefers the licensing of the weak entrant to the strong entrant. Copyright © 2006 John Wiley & Sons, Ltd.

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