Technology Licensing Under Competition: Absorptive Capacity vs. Innovation Capability

Abstract

Existing studies on technology licensing for quality-improving technology neglect the licensee's absorptive capacity or assume the complete absorption of technology for product quality. However, the licensee's absorptive capacity may significantly impact the benefit of technology licensing and has received extensive attention in practice and research. To address this gap, this study analyzes the optimal licensing strategy of vertically differentiated products by considering patentor's innovation capability and licensee's absorptive capacity, giving three types of licensing including fixed-fee licensing contact, per-unit royalty licensing, and two-part <italic xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">ad valorem</i> licensing. We find that not only the patentor's innovation capability but also the licensee's absorptive capacity can significantly influence the optimal licensing strategy. The patentor may prefer per-unit royalty licensing and two-part <italic xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">ad valorem</i> licensing to fixed-fee licensing. Moreover, technology licensing always benefits customers and society. Our work specifies the decision space for the patentor in evaluating the value of different licensing contracts and provides a new decision tool for choosing the optimal licensing strategy. We provide interesting management insights into understanding the optimal licensing strategy from the perspective of the patentor, customers, and society.