Network Effects and Technology Licensing with Fixed Fee, Royalty, and Hybrid Contracts.

Author List: Lin, Lihui; Kulatilaka, Nalin;
Journal of Management Information Systems, 2006, Volume 23, Issue 2, Page 91-118.
Technology innovators are faced with the question of whether to license an innovation to other firms, and if so, what type of license it should use. This question takes on paramount importance with information technology innovations that lead to new products and services that exhibit network effects. This paper explores the impact of network effects on the licensing choice. The literature suggests that without network effects, a royalty license is preferred by producer-innovators. We find that a fixed-fee license is optimal with strong network effects. For less intense network effects, the optimal license uses a royalty rate, either alone or in combination with a fee. We further derive the terms of the optimal license and discuss the impact of the investment needed to replicate the innovation and the size of the potential market. Our results provide insights for licensing decisions in industries that exhibit network effects.
Keywords: hybrid charging schemes; Licensing policy; licensing royalty; technology innovations
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#190 0.286 new licensing license open comparison type affiliation perpetual prior address peer question greater compared explore competing crowdsourcing provide choice place
#112 0.270 services service network effects optimal online pricing strategies model provider provide externalities providing base providers fee complementary demand offer derive
#285 0.144 effects effect research data studies empirical information literature different interaction analysis implications findings results important set large provide using paper
#242 0.112 market competition competitive network markets firms products competing competitor differentiation advantage competitors presence dominant structure share using incumbent make important
#271 0.073 technology investments investment information firm firms profitability value performance impact data higher evidence diversification industry payoff return findings decisions greater