Licensing radical product innovations to speed up the diffusion

Abstract

Inventors can commercialize innovative products by themselves and simultaneously license the technology to other firms. The licensee may cannibalize sales of the licensor, but this can be compensated by gains from royalties. We show in this paper how licenses can be used strategically to speed up the new product diffusion process in two instances of markets: (i) a market with strong Intellectual Property Rights (IPR), and (ii) a market with weak IPR holder and pirate rivals. The main findings suggest that licensing is a beneficial strategy for a licensor in the context of strong IPR, because licensor benefits from the royalties, the advertising investment and positive word-of-mouth effects by licensees. We compare this result with a weak IPR context, where piracy speeds up the product diffusion but this does not compensate IPR holder for the sales loss effect who is willing to license to get some royalties. However, pirates do not generally find interesting the licensing agreement. We present a comparative statics analysis based on numerical simulation.Product diffusion models, Licensing, Optimal control and differential games