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Licensing to Enhance Demand for New Technologies

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Author Info
Andrea Shepard
Abstract

This article presents a model in which licensing competitors expands demand for a new proprietary product and, therefore, may be a profit-maximizing strategy for the licensor even when licensing increases industry cost. In the model buyers care about price and quality, sellers can contract on price but not on quality, and a single supplier has monopoly power. Licensing induces quality competition and allows the supplying firms to make a quality commitment that would not be credible for a single firm. As a result, licensing increases industry demand and may generate an increase in industry revenue sufficient to offset any increase in industry cost. Some of the characteristics of the model are informed by observations in the semiconductor industry.

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Publisher Info
Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 18 (1987)
Issue (Month): 3 (Autumn)
Pages: 360-368
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Handle: RePEc:rje:randje:v:18:y:1987:i:autumn:p:360-368

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  1. Jay Pil Choi & Marcel Thum, 1997. "Market Structure and the Timing of Technology Adoption with Network Externalities," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  2. Richard Schmidtke, 2006. "Private Provision of a Complementary Public Good," Discussion Papers 134, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
  3. Niels Krap & Johannes Stephan, 2008. "The Relationship between Knowledge Intensity and Market Concentration in European Industries: An inverted U-Shape," IWH Discussion Papers 3-08, Halle Institute for Economic Research. [Downloadable!]
  4. Krishna B. Kumar & Raghuram G. Rajan & Luigi Zingales, 1999. "What Determines Firm Size?," NBER Working Papers 7208, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Josh Lerner & Jean Tirole, 2003. "The Scope of Open Source Licensing," Levine's Bibliography 506439000000000140, UCLA Department of Economics. [Downloadable!]
    Other versions:
  6. Schmidtke, Richard, 2006. "Private Provision of a Complementary Public Good," Discussion Papers in Economics 964, University of Munich, Department of Economics. [Downloadable!]
  7. Bijl, P. de, 1995. "Aftermarkets : the monopoly case," Discussion Paper 102, Tilburg University, Center for Economic Research. [Downloadable!]
  8. Severin Borenstein & Jeff MacKie-Mason & Janet Netz, 1994. "Tying and Market Power," Industrial Organization 9401001, EconWPA. [Downloadable!]
  9. Nisvan Erkal, 2003. "Buyer-Supplier Interaction, Asset Specificity, And Product Choice," Department of Economics - Working Papers Series 885, The University of Melbourne. [Downloadable!]
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  10. David Blackburn, 2002. "Complementarities and network externalities in casually copied goods," Estudios de Economia, University of Chile, Department of Economics, vol. 29(1 Year 20), pages 71-88, June. [Downloadable!]
  11. Aidan Hollis, 2002. "Strategic Implications of Learning by Doing," International Journal of the Economics of Business, Taylor and Francis Journals, vol. 9(2), pages 157-174, July. [Downloadable!] (restricted)
  12. Caroline Boivin & Corinne Langinier, 2005. "Technology Licensing to a Rival," Economics Bulletin, Economics Bulletin, vol. 12(15), pages 1-8. [Downloadable!]
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  13. Nicholas Economides, 1997. "Network Externalities, Complementarities, and Invitations to Enter," Industrial Organization 9701004, EconWPA. [Downloadable!]
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