Abstract
This paper proposes a strategic reason for a proprietary component supplier to license her technology to a competitor or a manufacturer: her anticipation of the manufacturer's strategic commitment to invest in research and development (R&D). We address this phenomenon with a game theoretic model. Our results show that the manufacturer's full commitment to invest in R&D enables the supplier to license, sell a larger quantity through the supply chain, and charge lower prices than the manufacturer's full commitment not to invest in R&D. These results are robust to the type of demand uncertainty faced by the manufacturer within the class of increasing generalized failure rate (IGFR) distributions.
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