Patent licensing, bargaining, and product positioning

Innovators who have developed advanced technologies, along with launching new products by themselves, often license these technologies to their rivals. When a firm launches a new product, product positioning is also an important matter. We consider a standard linear city model with two firms in which the licenser and the licensee negotiate on licensing and engage in Nash bargaining after they determine their product positions. We investigate how the bargaining power of the licenser affects the product positions of the firms. We find that the licenser more likely chooses the central position when its bargaining power is weak whereas the product position of the licenser accelerates price competition between the firms. We also discuss the welfare implication. We find that the inverse U shape relationship between the bargaining power of the licenser and total social surplus, i.e., neither too strong nor too weak bargaining power of the licensor is optimal.