Licensing to Enhance Demand for New Technologies

Abstract

This article presents a model in which licensing competitors expands demand for a new proprietary product and, therefore, may be a profit-maximizing strategy for the licensor even when licensing increases industry cost. In the model buyers care about price and quality, sellers can contract on price but not on quality, and a single supplier has monopoly power. Licensing induces quality competition and allows the supplying firms to make a quality commitment that would not be credible for a single firm. As a result, licensing increases industry demand and may generate an increase in industry revenue sufficient to offset any increase in industry cost. Some of the characteristics of the model are informed by observations in the semiconductor industry.

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