Fixed-fee Licensing Research Articles

Foreign Direct Investment and Technology Licensing in a Polluting Industry

We consider a firm’s incentive for foreign direct investment (FDI) and international technology licensing in a polluting industry. We explain the rationale and the welfare implications of complementarity between FDI and licensing, i.e., the firm’s strategy of “FDI and licensing” (FL), which is empirically relevant but ignored in the literature. When the environmental tax cannot be committed, the firm adopts the licensing strategy if the pollution intensity is not high, and the licensing strategy may create lower consumer surplus and welfare compared to both FDI and FL. However, if the pollution intensity is high, the firm undertakes FL, which provide higher consumer surplus and welfare compared to both licensing and FDI. When the government can commit to the environmental tax, the firm always prefers FL. The host-country welfare is higher but the consumer surplus and world welfare may be lower under the committed tax policy compared to the non-committed tax policy. These results hold under Cournot competition and Stackelberg competition. We further show that FL can be the equilibrium strategy of the foreign firm if there is fixed-fee licensing instead of a two-part tariff licensing, which is considered in the main analysis.

Technology Licensing Under Competition: Absorptive Capacity vs. Innovation Capability

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.

Coopetition Strategy Choice of Duopoly Manufacturers with Key Component Technology Transfer

This paper investigates the strategic choice of key component technology transfer between two rival manufacturers. A benchmark competition model and two coopetition models (including fixed-fee licensing coopetition and two-part tariff licensing coopetition) where the manufacturers compete for end-customer demand while simultaneously collaborating on key component technology transfer through licensing. By comparing the outcomes of the competition model and coopetition models, it is shown that: (1) The optimal strategy choice for manufacturers depends on the degree of product substitution, the interfirm power relationship as well as the production cost difference of key components. Among them, the interfirm power relationship has the most significant impact on the optimal strategy choice. (2) Under certain conditions, fixed fees and two-part tariff patent licensing coopetition can achieve Pareto improvement and reduce the retail price of products, which is beneficial to both manufacturers and consumers. (3) The production cost difference of key components significantly affects whether manufacturers can achieve Pareto improvement under two coopetition models.

Quality-improving licensing of an outside innovator in a mixed Cournot duopoly

This paper proposes a mixed Cournot duopoly model with private and partially public firms to study an outside innovator's optimal licensing strategy. The innovator decides how and to whom it licenses its quality-improving innovation. We uncover three main findings. First, constrained to exclusive contracts, fixed-fee licensing to the public firm is always optimal. Second, constrained to non-exclusive contracts, fixed-fee licensing outperforms royalty licensing when the innovation size and the private share of the public firm are sufficiently large. Finally, if the innovator can freely decide on contracting exclusivity, fixed-fee licensing to the public firm emerges as the optimal choice. This result holds even when exclusive auction and two-part tariffs are available. We further examine social welfare effects, determining that a conflict regarding contracting exclusivity may arise between the innovator and the state.

Strategic Licensing of Green Technologies to a Brown Rival: A Game Theoretical Analysis

This paper studies a green manufacturer’s strategic licensing of its green technology to a brown rival under the consideration of the green manufacturer’s environmental concerns. Consumers in the market have green awareness. Adopting the green technology not only helps manufacturers to reduce carbon emissions, but also to increase market sizes. The green manufacturer can choose from three technology licensing strategies, i.e., no licensing (N), royalty licensing (R) or fixed-fee licensing (F). The equilibrium licensing strategy can be derived by comparing the respective payoff after adopting the three strategies. It is found that the green manufacturer should choose fixed-fee licensing strategy when the market size expansion effect is strong, and the competition intensity is moderate; otherwise, the green manufacturer should choose royalty licensing strategy. Furthermore, it is found that when the green manufacturer is more concerned about environmental impacts, it will be more willing to choose fixed-fee licensing strategy, rather than royalty licensing strategy. Through numerical tests, some interesting results are also found. For example, the brown manufacturer might be hurt even if the cost reduction effect of technology licensing is relatively stronger. Moreover, it is found that consumer surplus and social welfare nonmonotonically change with the substitution level. In summary, this research tries to provide some guidelines to the industry and the society on better managing green technology diffusions.

OPTIMAL LICENSING STRATEGY OF GREEN TECHNOLOGY WITH CORPORATE SOCIAL RESPONSIBILITY

This study investigates the green technology licensing strategies of firms with corporate social responsibility (CSR) in a duopoly market. The results show that in the absence of CSR, the optimal licensing contract is fixed-fee licensing for a patent holding firm. In the precent of CSR, the optimal licensing contract for a patent holding firm switches from fixed-fee licensing to royalty licensing with increasing level of CSR if the reduction cost of emissions is high. Moreover, we show that the profit goal of firm and the social welfare goal of government are not always mutually exclusive. If the level of CSR is low, a uniform licensing contract would be preferable. If the level of CSR is high, the optimal licensing contract is inconsistent. Finally, we show that CSR is not always beneficial to the social welfare while CSR benefits the environment. Social welfare benefits from increased CSR degree, but vice versa is true when CSR degree decreases. This research may provide valuable insights into licensing and CSR literature.

Mixed competition and technology licensing in a supply chain.

Technology licensing as a vital part of business behavior in many industries has drawn a fair amount of attention in industrial organization literature. Most existing literature on licensing decisions assumes that all firms engage in Cournot or Bertrand competition, while the type of mixed competition may affect the choice of the licensor. In this context, what decision will the licensor make faced with different mixed competitions? This paper studies the optimal technology licensing contract of a licensor firm engaging in different mixed competitions (Cournot-Bertrand or Bertrand-Cournot) with a potential licensee in a differentiated duopoly market considering one upstream firm (supplier) that provides key inputs. We find that if either the royalty or fixed-fee licensing is applied, the licensor favors royalty licensing under Bertrand-Cournot competition when the degree of substitution is small and prefers the fixed-fee licensing no matter under what kind of mixed competition as the degree of substitution increases. In the case of fixed-fee licensing, the result shows that the profits of licensors are the same under different types of mixed competition. Besides, fixed-fee licensing is not always the optimal choice for consumers, and they would prefer royalty licensing when the degree of substitution is very small.

Optimal technology licensing contract with quality improvement innovation under Cournot competition

This paper analyzes the optimal licensing contract for the patentor with a quality improvement innovation in a Cournot duopoly market. We examine and compare three licensing contracts (fixed-fee licensing, royalty licensing, and two-part ad valorem licensing) in terms of the patent-holding firm’s profit, consumer surplus, and social welfare. We also study the impact of quality differences on the choice of licensing contract. One might expect that consumer surplus and social welfare are greater under fixed-fee licensing. However, we show that this conclusion seems to be untrue under quality improvement technology licensing. Moreover, we find that (1) there exists a threshold for the degree of quality difference above which fixed-fee licensing will be listed for the consideration of the patent-holding firm and below which it will be abandoned; (2) royalty licensing and two-part ad valorem licensing are always profitable for the patent-holding firm and two-part ad valorem licensing brings the patentee the most profit.

Consumer welfare, licensing, and exclusive dealing with vertically- and horizontally-differentiated products

We explore the existence of anticompetitive exclusive dealing when the downstream firm produces both vertically-and horizontally products. Our study shows that the licensing scheme has crucial ramifications for considering the possibility of exclusive dealing. For royalty licensing, the less the horizontal differentiation or the similar the quality of the two products is, the less possibility there is for exclusive dealing. However, under two-part tariff licensing, a pure fixed fee is preferred by a licensor, it is more likely to foster exclusive dealing. Moreover, we explore the consumer welfare implications and find that royalty licensing may prevent anticompetitive exclusion and lead to greater consumer surplus, which runs against the conventional wisdom that fixed fee licensing is socially desirable. In addition, royalty licensing can be favorable to the outside licensor if the licensor can commit at the beginning of the game.

Green technology licensing under platform selling

Industrial practice has shown that technology licensing is of great importance to green technology development. This study investigates licensing strategies for green technology under the background of platform selling. We consider an online platform operating through agency selling and two competitive firms one of which is an innovator investing in green technology. The innovator has an option to offer a license for the green technology to its competitor. Using No licensing scenario as a benchmark, we examine two alternative licensing strategies (Fixed-fee licensing vs. Royalty licensing) when the innovator licenses the technology. We find that licensing enhances the optimal green technology level, each firm’s optimal price, and realized demand. Royalty licensing strategy outperforms Fixed-fee licensing strategy from the viewpoint of environmental performance and the innovator’s profitability. Interestingly, we find that product price may decline with production cost, and when the platform charges firms a higher commission rate, the firms will choose a lower product price in some condition. Furthermore, by numerical examples, we observe an increasing commission rate may hurt the platform.

Dilemma of quality information disclosure in technology licensing

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.

Optimal licensing strategy of green technology in a mixed oligopoly: Fixed fee versus royalty

This paper develops a mixed oligopoly model to explore the optimal licensing strategy of green technology. In our model, either private firm or public firm could be the patentee. We show that when the private firm is the patentee, all the two types of licensing contracts (i.e., fixed fee and royalty) are optimal. However, when the public firm is the patentee, the fixed fee licensing is the optimal licensing contract. We examine the welfare consequence of a privatization policy under the optimal licensing contract and show that the privatization policy hinder the improvement of social welfare.

Strategic technology commercialization in the supply chain under network effects

We explore the optimal technology commercialization strategy of an inside innovator in the downstream of a two-tier supply chain when network effects exist via a game-theoretical framework. This setting incorporates in a unified model the two strategic incentives for the innovator to license to potential competitors for free, i.e., expanding the network size and driving down the wholesale price, thus it enables us to disclose how these two incentives interact with each other to influence the innovator's choice between the internal and external commercialization strategies. Our analyses reveal several interesting results. First, it is beneficial for the innovator to license to the entrant, even for free, when the relative quality of the low-end product provided by the latter is moderate. Second, when the network effects are weak and the quality of the low-end product to introduce is high, the innovator prefers the internal commercialization strategies, while the supplier and the consumers prefer the external commercialization strategy. Third, if licensing fees can be collected, the fixed-fee licensing contract dominates the royalty licensing contract when network effects are strong, or when the entrant is relatively weak. In addition, in the extended models, we point out that our key findings and insights are relatively robust with respect to the market structure in the upstream of the supply chain (monopolistic versus competitive) or the cost structure of the differentiated final products (homogeneous or heterogeneous), but they are somewhat different under alternative wholesale price mechanisms (uniform versus discriminatory).

Comparison between different licensing schemes in a Stackelberg model when the follower is the innovator

In the present paper we consider a differentiated-good Stackelberg model, when the follower firm engages in an R&amp;D process that gives an endogenous cost-reducing innovation. We assume that there can exist a technology transfer between innovator and non-innovator firm. The aim of this paper is three-fold: to do a comparison of the fixed-fee and royalty licensing cases, of the two-part tariff and royalty licensing cases, respectively of the two-part tariff and fixed-fee licensing cases, in order to state in which case is indicated for the innovator firm to license its technology. This comparison allows us to identify which licensing scheme is more profitable for the innovator (follower firm).

Competitive strategies for original equipment manufacturers considering carbon cap and trade

This paper considers an original equipment manufacturer (OEM) faces competition from an independent remanufacturer (IR) and they both are regulated by carbon cap and trade policy (CTP). We develop models to explore the OEM’s optimal competitive strategy in the face of IR’s competition and environmental regulation. We first investigate the impact of CTP on the OEM and IR. Then, we analyze three competitive strategies that the OEM may choose: remanufacturing, fixed-fee licensing, and royalty licensing. We investigate their optimal decisions under each strategy and identify the conditions under which these strategies can coordinate the OEM and IR. Finally, we explore conditions under which one strategy is superior to another. The results show that the OEM is worse off when competing with the IR under CTP if the carbon cap allocated to the OEM is small. Fixed-fee licensing and royalty licensing can coordinate the OEM and IR not only from an economic perspective but also from an environmental perspective. The OEM’s optimal competitive strategy is determined by thresholds of three critical parameters: the fixed cost of setting up a remanufacturing system, the fixed-fee, and the per-unit royalty. We provide specific guidance on strategy selection for the OEM.

On the Sustainability of Technology Licensing Under Asymmetric Information Game

Past research indicates that a licensor tends to adopt the fixed fee, in order to obtain higher profit rather than secure royalty when he participates in zero production in the market. This study instead finds that the patentee’s optimum strategy may vary. In addition to the fixed-fee strategy, royalty or mixed licensing, or fixed fee plus royalty may be potential choices for the patentee as well which is depend on the market scale, incidence of market scale, and magnitude of cost-saving. The patentee may choose to only authorize a type of high market size based on self-interested motives. The technology licensing market is not sustainable.

Quality differentiation and product innovation licensing

Evidence reveals that there are more than 50% product innovation licensings applied within industries. We study product innovation licensing (quality-enhancing licensing) in both exclusive and non-exclusive schemes each under unit/revenue royalty and fixed fee in a vertically differentiated Cournot oligopoly, where a quality-leading firm is an internal licensor. We show that, under a non-exclusive licensing, royalty licensing is the superior policy for the licensor if quality difference within firms is small, regardless of whether a unit or revenue royalty scheme is offered. Under an exclusive licensing, a two-part tariff is optimal. If fixed fee licensing is practicable, the licensor favors an exclusive licensing. Furthermore, an increase in quality difference within firms increases the optimal rates. Using the simulated results, we examine that licensing improves social welfare in all schemes, and the number of licensees will influence the magnitude of welfare enhancement.

A decision model for competitive remanufacturing systems considering technology licensing and product quality strategies

Abstract Fast maturation and obsolescence of electronics have caused the accumulation of untreated Waste Electrical and Electronic Equipment (WEEE), which results in environmental issues around the globe. Accordingly, remanufacturing systems have been developed to recover or perform proper disposal of WEEE. Over the decades, remanufacturing has continuously grown and has attracted customers' interest in reprocessed products, hence, inducing the competition of the said market. For a remanufacturer to gain a competitive advantage in the market, it is necessary to optimize both operational and managerial aspects comprehensively. Therefore, this study aims to model the competition between independent remanufacturer player's (IR) supply chain systems that integrate these two aspects. First, IR's supply chain system operational decisions involving multi-period-horizon and multi-process production planning, product flow, and product purchasing and takeback will be formulated into a mixed integer linear model. Lastly, IRs' supply chain system compete with each other in a perfect-market-competition game model that considers technology licensing and product quality strategies. Results from numerical examples show that royalty licensing is the better technology licensing strategy compared to fixed-fee licensing strategy in terms of costs. In addition, selling remanufactured products, which are of higher quality, yield less profit than selling refurbished products. However, remanufactured products are less susceptible to product value depreciation and price changes over time, therefore, generating more stable income in different conditions. With the fast-paced technological development, the proposed model could address complex remanufacturing supply chain problems, offering decision-makers a tool in optimizing the remanufacturing system.

Optimal Abatement Technology Licensing in a Dynamic Transboundary Pollution Game: Fixed Fee Versus Royalty

Transboundary pollution poses a major threat to environment and human health. An effective approach to addressing this problem is the adoption of long-term abatement technology; however, many developing regions are lacking in related technologies that can be acquired by licensing from developed regions. This study focuses on a differential game model of transboundary pollution between two asymmetric regions, one of which possesses advanced abatement technology that can reduce the abatement cost and licenses this technology to the other region by royalty or fixed-fee licensing. We characterize the equilibrium decisions in the regions and find that fixed-fee licensing is superior to royalty licensing from the viewpoint of both regions. The reason is that under fixed-fee licensing, the regions can gain improved incremental revenues and incur reduced environmental damage. Subsequently, we analyze the steady-state equilibrium behaviors and the effects of parameters on the licensing performance. The analysis indicates that the myopic view of the regions leads to short-term revenue maximization, resulting in an increase in total pollution stock. Moreover, a high level of abatement technology or emission tax prompts the licensee region to choose fixed-fee approach, which is beneficial both economically and environmentally for two regions.

Luxury Brand Licensing: Free Money or Brand Dilution?

Marketing research has traditionally focused on centralized brand-extension strategies where a brand expands its product offerings by controlling the design, production, marketing and sales of new products `in-house'. However, luxury brands frequently use `brand licensing' as a decentralized brand-extension strategy under which a brand licenses its brand name to an `external licensee' that designs, produces and sells the new product. Licensing is a time-efficient and cost-effective brand-extension strategy for luxury brands to reach out to their aspirational, low-end consumers (`followers') who value a brand more when more high-end consumers (`snobs') purchase the brand's primary product (i.e., `positive popularity effect'). On the other hand, over-licensing might dilute the brand for snobs who value brand exclusivity (i.e., `negative popularity effect'). We develop a game-theoretic model to study luxury brand licensing in the presence of these two countervailing forces. First, in the monopoly setting (a benchmark), we find that the monopoly brand should license only when the negative popularity effect is not too high, and it should prefer `royalty licensing' over `fixed-fee licensing' when the negative popularity effect is intermediate. Second, to explicate our analysis, we study the duopoly setting under fixed-fee contracts. In contrast to the monopoly setting, we find that fixed-fee licensing can `soften' price competition between brands so that licensing is `always' profitable for both brands under competition. Interestingly, in equilibrium under fixed-fee contracts, competing brands face a prisoner's dilemma and both brands prefer not to license, even though both would be better off if they could commit to fixed-fee licensing. Finally, we expand our analysis of the duopoly model by incorporating royalty licensing in addition to fixed-fee licensing. We find that, in contrast to fixed-fee licensing, royalty licensing can `intensify' price competition so that both brands have to lower their prices. Consequently, when the positive popularity effect is sufficiently strong, fixed-fee licensing `dominates' royalty licensing. We also show that, under competition, luxury brands should adopt royalty contracts only when the licensing market is large, and positive and negative popularity effects are small enough.