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Review of Managerial Science

Erschienen in:

01.10.2016 | Original Paper

Fixed fee licensing for cost-reducing technologies: Should innovators reveal their private information?

verfasst von: Sandro Gleave, Eberhard Feess

Erschienen in: Review of Managerial Science | Ausgabe 4/2016

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Abstract

In the process of licensing their technology to downstream firms, innovators often get some information on the firms’ cost reductions. Revealing this information to the market influences the market game, and thereby the licensees’ willingness to pay. We analyze the innovator’s optimal information provision with fixed fee licensing. Our main result is that the innovator should reveal the number of licenses, but should keep silent on the cost reductions of licensees. The intuition is that the innovator’s profit depends only on the willingness to pay of the critical firm which only just buys a license, and this firm benefits if the number of firms is revealed, but nothing is learned on the actual cost distribution.

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ARM licenses its microprocessor IP to the majority of the world’s leading semiconductor companies and the company’s webpages feature selected information on ARM’s licensees.

Games where the innovator and/or the licensees need to exert effort after licensing to develop the product include Choi (2001), Schmitz (2002) and Schmitz (2007).

In the model, we could simply assume that wrong information could be found out with some probability and that damages for breach of contract or long-term consequences from reputation losses are sufficiently high.

Upper bars denote expectations.

To avoid misunderstandings, we emphasize that the probability that there exists a firm having exactly type \(\hat{\theta }^{D}\) is zero due to the fact that cost types are continuous while the number of firms is discrete. However, all that counts for our analysis is that all firms with types \(\theta _{i}\le \hat{\theta }^{D}\) will buy licenses while all types \(\theta _{i}>\hat{\theta }^{D}\) will not.

The numerical example is available on request.

Note that, for \(\phi ^{D}=\phi ^{P}\) given, \(\hat{\theta }^{P}\) and \(\hat{\theta }^{D}\) may well differ as the firms’ wtp does not only depend on the price and the own marginal costs, but also on the licensing game.

\(\hat{\theta }\) differs under the three policies, and we will immediately account for this.

We concede that firm 2’s market behavior does not only depend on the mean value it expects of firm 1’s costs but rather on the full probability distribution, but restricting attention to the mean value is sufficient to convey the intuition.

To avoid misunderstandings, type \(\theta _{i}=\overline{\theta }\) will not buy a license in equilibrium as the wtp is below the profit-maximizing license price \(\phi ^{P}\). Still, it is interesting to note that the wtp is positive.

Proof available on request.

Consider for instance Policy D in our numerical example with two firms only and a = 25 and \(\overline{\theta }=10\). If the social planner knows that the marginal costs of one firm with the new technology are \(\theta _{1}=0\), then it can easily be calculated that the second firm should be licensed if and only if \(\theta _{2}<\frac{100}{11}\).

Recall that the literature on the licensing of auctions discussed in the introduction basically restricts attention to just one license or to duopolies in the market game, and similar restrictions would apply to our setting.

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Titel: Fixed fee licensing for cost-reducing technologies: Should innovators reveal their private information?
verfasst von: Sandro Gleave
Eberhard Feess
Publikationsdatum: 01.10.2016
Verlag: Springer Berlin Heidelberg
Erschienen in: Review of Managerial Science / Ausgabe 4/2016
Print ISSN: 1863-6683
Elektronische ISSN: 1863-6691
DOI: https://doi.org/10.1007/s11846-015-0176-6

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