Publication: Licensing radical product innovations to speed up the diffusion
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2011-11
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Abstract
Inventors can commercialize innovative products by themselves and simultaneously license the
technology to other firms. The licensee may cannibalize sales of the licensor, but this can be
compensated by gains from royalties. We show in this paper how licenses can be used
strategically to speed up the new product diffusion process in two instances of markets: (i) a
market with strong Intellectual Property Rights (IPR), and (ii) a market with weak IPR holder and
pirate rivals. The main findings suggest that licensing is a beneficial strategy for a licensor in the
context of strong IPR, because licensor benefits from the royalties, the advertising investment and
positive word-of-mouth effects by licensees. We compare this result with a weak IPR context,
where piracy speeds up the product diffusion but this does not compensate IPR holder for the sales
loss effect who is willing to license to get some royalties. However, pirates do not generally find
interesting the licensing agreement. We present a comparative statics analysis based on numerical
simulation.
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Product diffusion models, Licensing, Optimal control and differential games