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Licensing to Enhance Demand for New Technologies


  • Andrea Shepard


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.

Suggested Citation

  • Andrea Shepard, 1987. "Licensing to Enhance Demand for New Technologies," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 360-368, Autumn.
  • Handle: RePEc:rje:randje:v:18:y:1987:i:autumn:p:360-368

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    References listed on IDEAS

    1. Glenn C. Loury, 1979. "Market Structure and Innovation," The Quarterly Journal of Economics, Oxford University Press, vol. 93(3), pages 395-410.
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