Strategic Licensing with Retail Competition: an Innovation Theory of Harm

We study incentives to license an innovation in a vertically related market, where upstream innovations can sell new technology to downstream retailers that sell differentiated products to final consumers. In a context with private actions, private outcomes, and uncertainty regarding the innovation's success, the decision to license depends on the nature of the downstream products. When goods are strong complements, an innovator licenses its technology to signal the feasibility of the innovation, allowing the competing innovator to complete the research process. When goods are sufficiently weak complements or substitutes (so that the innovator’s bargaining position worsens when both retailers adopt), an innovator may either license immediately, thereby foreclosing competing innovations, or delay licensing to induce pessimism in the rival innovator, potentially causing them to abandon the race prematurely. Therefore, our model proposes a new theory of harm in which innovators can strategically delay licensing to manipulate rival's learning process.