TY - JOUR
T1 - Licensing to a competitor and strategic royalty choice in a dynamic duopoly
AU - Wu, Cheng Han
N1 - Funding Information:
The authors thank the anonymous referees for their constructive comments and suggestions, which significantly enhanced the paper. This research was supported by the Ministry of Science and Technology, Taiwan, R.O.C. under #MOST 106-2221-E-224-034-MY2.
Publisher Copyright:
© 2019 Elsevier B.V.
PY - 2019/12/16
Y1 - 2019/12/16
N2 - Network effects encourage original equipment manufacturers (OEMs) to expand their market size by changing their relationships with third-party manufacturers who provide compatible products from competition to coopetition. Moreover, network effects render consumer valuation inherently dynamic. Consumer perceptions of the sales quantity are continuously updated, causing the impact of the network effect to change dynamically over time. To this end, we examine technology licensing and price competition in a dynamic duopoly including an OEM and a third-party manufacturer, considering that consumer utility increases with the dynamic and evolving impact of network effects. However, because of limited product technology, the lower compatibility of third-party products reduces network effects. Thus, the third-party manufacturer licenses technology from the OEM. Because the OEM can strategically choose a static or dynamic royalty under technology licensing in a dynamic pricing game, we derive the firms’ subgame-perfect Nash equilibrium decisions and profits and analyze the effects of licensing mechanisms and market factors on firms’ instantaneous and steady-state equilibrium decisions and profits. Technology licensing enhances firms’ profits when firms’ and consumers’ dynamic behaviors are more significant by exerting stronger network effects. A dynamic royalty is more effective for mitigating price competition intensity and for helping firms maintain higher sales margins. A static royalty induces a lower royalty chosen by the OEM and firms lower prices, which increases the impact of network effects and thus is generally more advantageous for the firms and for social welfare.
AB - Network effects encourage original equipment manufacturers (OEMs) to expand their market size by changing their relationships with third-party manufacturers who provide compatible products from competition to coopetition. Moreover, network effects render consumer valuation inherently dynamic. Consumer perceptions of the sales quantity are continuously updated, causing the impact of the network effect to change dynamically over time. To this end, we examine technology licensing and price competition in a dynamic duopoly including an OEM and a third-party manufacturer, considering that consumer utility increases with the dynamic and evolving impact of network effects. However, because of limited product technology, the lower compatibility of third-party products reduces network effects. Thus, the third-party manufacturer licenses technology from the OEM. Because the OEM can strategically choose a static or dynamic royalty under technology licensing in a dynamic pricing game, we derive the firms’ subgame-perfect Nash equilibrium decisions and profits and analyze the effects of licensing mechanisms and market factors on firms’ instantaneous and steady-state equilibrium decisions and profits. Technology licensing enhances firms’ profits when firms’ and consumers’ dynamic behaviors are more significant by exerting stronger network effects. A dynamic royalty is more effective for mitigating price competition intensity and for helping firms maintain higher sales margins. A static royalty induces a lower royalty chosen by the OEM and firms lower prices, which increases the impact of network effects and thus is generally more advantageous for the firms and for social welfare.
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U2 - 10.1016/j.ejor.2019.06.035
DO - 10.1016/j.ejor.2019.06.035
M3 - Article
AN - SCOPUS:85067900300
SN - 0377-2217
VL - 279
SP - 840
EP - 853
JO - European Journal of Operational Research
JF - European Journal of Operational Research
IS - 3
ER -