Dilemma of quality information disclosure in technology licensing

Abstract

This study investigates the technology licensing decision of an incumbent patentor with quality-improving technology in duopoly model with heterogenous 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.