Supplier Encroachment and Patent Licensing Strategy in Technology-Intensive Supply Chains

Abstract

Supplier encroachment in technology-intensive supply chains is an emerging and important research topic in communication technology. In order to assess the impact of patent licensing on supplier encroachment and firms’ performance, we model a technology-intensive supply chain comprising a component supplier holding patents and a product manufacturer. The patent-licensing fee to the retailer is charged either via a component-based strategy (Strategy C), i.e., a percentage of the component price, or a product-based strategy (Strategy P), i.e., a percentage of the final-product price. The supplier decides whether to encroach into the market. Our research illustrates that compared with Strategy C, Strategy P allows the supplier to take a share of the manufacturer’s market revenue, thus discouraging the supplier from encroachment. Counterintuitively, we find that the supplier prefers to Strategy C when the sales cost is relatively high and the royalty rate under Strategy P is relatively low, and the manufacturer prefers to Strategy P when the sales cost is relatively low or moderate. We also reveals that under certain conditions, the preferences of the supplier and manufacturer for licensing strategies can align with both strategies C and P providing better economic benefits to both parties.