Licensing radical product innovations to speed up the diffusion

Abstract

We present a differential game to study how companies can simultaneously license their innovations to other firms when launching a new product. The licensee may cannibalize licensor’s sales, albeit this can be compensated by gains from royalties. Nonetheless, patent royalties are generally so low that licensing is not an attractive strategy. In this paper we consider the role of licensing to speed up the product diffusion. Word of mouth by licensee’s customers and licensee’s advertising indirectly push forward sales of the licensing company, accelerating new product diffusion. We find evidence that licensing can be a potentially profitable strategy. However, we also find that a weak Intellectual Property Right (IPR) protection can easily diminish the financial attractiveness of licensing.