Licensing to a competitor and strategic royalty choice in a dynamic duopoly

Research output: Contribution to journalArticle

Abstract

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.

Original languageEnglish
Pages (from-to)840-853
Number of pages14
JournalEuropean Journal of Operational Research
Volume279
Issue number3
DOIs
Publication statusPublished - 2019 Dec 16

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Profitability
Profit
Sales
Subgame Perfect Equilibrium
Dynamic Pricing
Consumer Behaviour
Licensing
Competitors
Dynamic duopoly
Network effects
Royalty
Welfare
Business
Nash Equilibrium
Valuation
Margin
Compatibility
Dynamic Behavior
Expand
Instantaneous

All Science Journal Classification (ASJC) codes

  • Computer Science(all)
  • Modelling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management

Cite this

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Licensing to a competitor and strategic royalty choice in a dynamic duopoly. / Wu, Cheng-Han.

In: European Journal of Operational Research, Vol. 279, No. 3, 16.12.2019, p. 840-853.

Research output: Contribution to journalArticle

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