Technology licensing contracts with network effects

We study the optimal technology licensing contracts with network effects and investigate the welfare implications when the product innovator is an insider that acts as a Stackelberg leader. We show that (i) the market is fully covered when relatively small network intensity matches quality differentiations that are sufficiently large; (ii) with regard to profit maximization, the optimal licensing strategy varies from one of royalty licensing to two-part tariff licensing as network effects increase (not including fixed-fee licensing); (iii) consumer surplus is optimal under non-licensing conditions in comparison to other licensing strategies, due to the covered market; (iv) depending on network effects, the preferred strategies to achieve social welfare maximization change from no-licensing or fixed-fee licensing to two-part tariff licensing, and royalty licensing is not preferred in this instance; (v) conflict does not always or necessarily occur between the goals of enterprise profit maximization and social welfare optimization. Two-part tariff licensing is preferred both by the licensor and by society when the network effect is large.