Licensing Radical Product Innovations to Speed Up the Diffusion, University Carlos III de Madrid Working Paper, No. 11-36-9
Inventors can commercialize innovative products by themselves and simultaneously license the technology to other firms. Research recognizes that the licensee may cannibalize sales of the licensor, but this can be compensated by gains from royalties.
This paper emphasizes the marketing value of licensing to generate revenues. In this paper we consider a differential game where inventors use licenses as a strategy to speed up the sales. We assume that the growth of the product-demand follows a Bass-type diffusion process. We propose a model that captures the strategic game between licensors and licensees to study the impact of licensing strategies to speed up diffusions in two instances of markets:
a market with strong Intellectual Property Rights (IPR), and
a market with weak IPR holder and pirate rivals.
We examine the conditions under which it is, or is not, profitable to license for the IPR holder. The main findings suggest that licensing is a beneficial strategy for a licensor in the context of strong IPR, because licensor benefits from the advertising investment and positive word-of-mouth effects by licensees. In the context of weak IPR, piracy speeds up the product diffusion via word-of-mouth and marketing effort but this does not compensate for the sales loss effect, and licensing is a beneficial strategy to cover losses from royalties. However, pirates do not generally find interesting the licensing agreement.