Licensing strategy for a stochastic R&D firm in a differentiated Cournot duopoly model

Abstract

This paper investigates an innovating firm’s licensing strategy in a differentiated Cournot duopoly model when the firm is an insider and the R&D outcome is stochastic. We develop a duopoly game model in which the innovating firm has three options for licensing its innovation: fixed-fee licensing, royalty licensing and two-part tariff licensing. We consider three stages in the model: the R&D, licensing and output stages. We find that product differentiation and technology spillover play significant roles in the innovating firm’s choice between fixed-fee and royalty licensing. In addition, regardless of the degree of product differentiation, we find that (1) two-part tariff licensing is superior to both fixed-fee and royalty licensing when technology spillover is low and that (2) two-part tariff licensing is equivalent to royalty licensing when technology spillover is high.