Technology licensing strategies for three cost-differential manufacturers

This research investigates cost-efficient manufacturer technology licensing strategies for three cost-differential manufacturers that produce partially substitutable products. Among a technology innovator, a mid-cost manufacturer, and a high-cost manufacturer; four strategies are considered including: competition; licensing of the technology by the innovator to either the mid- or high-cost manufacturer exclusively; and licensing of the technology to both the mid- and high-cost manufacturers. Following the modeling framework of an oligopolistic competition, we derive the equilibrium solutions for the alternative licensing strategies and explore the optimal strategy by evaluating the profits of the licensor, licensee(s) and unlicensed manufacturer in the different licensing models. We find that each of the four licensing strategies has the potential to deliver the best economic performance, but the optimal strategy in a given situation depends on the unit production cost differences among the three manufacturers. The underlying principle that determines it is the trade-off between the economic gain and loss from technology licensing, which is influenced by differences in production costs, market competition intensity, and the power relationship between licensor and licensee(s). Licensing coopetition between an innovator and a licensee could force an unlicensed manufacturer to exit the market, highlighting the interactive effect of coopetition in a triad. We also find that licensing cost-reducing technology among competitors will always improve social welfare compared with competition. Although the improvement in social welfare is mainly driven by increased economic performance of the manufacturers, it is not necessarily at the expense of customers with decreased consumer surplus.