Research On Technology Licensing Strategies Under Network Externalities

With the advent of knowledge economy in the 21st century, the economic and social development is increasingly relying on the creative application of knowledge and technology innovation. Because of the networks and informationization in knowledge economy, many industries showed strong network externalities, and network externality is a key factor in technology trade and technology diffusion. Technology licensing strategies under network externalities are causing more and more theoretical and industrial concerns. We will explore the impacts of network externalities on innovator's technology licensing strategies, taking into account factors such as innovation level, supplier decision, technology competing/ complementing and the type of network externalities.Firstly, considering the factors of technology innovation level and supplier decision, we analyze the optimal licensing strategies under the network externalities for internal innovator. Among them, in chapter 2, we explore how network externalities and innovation level affect the innovator's technology licensing strategy. Under pure strategies,We find that with weak network externalities, royalty licensing strategy is optimal,and with strong network externalities, fixed-fee licensing strategy is optimal. When the network externalities are moderate, with low innovation level, royalty licensing strategy is optimal, and with high innovation level, the fixed-fee licensing strategy is optimal. As hybrid licensing strategy is included, with weak network externalities and low innovation level, royalty licensing strategy is optimal, with strong network externalities, fixed-fee licensing strategy is optimal, and with other conditions, hybrid licensing strategy is optimal. In chapter 3, we explore how network externalities and supplier pricing affect the internal innovator's technology licensing strategy. We show that for innovators, royalty licensing strategy is optimal to no-licensing strategy. On one hand, a royalty license to a potential entrant can expand market share of the new product, which improves the network externality effects, on the other hand, a royalty licensing to a potential entrant can reduce the wholesale price, then reduce the loss of efficiency caused by supply chain"double marginal effects". Innovators can not only gain from horizontal competitors, but also can siphon gains from the vertical supplier. We find that fixed-fee licensing strategy can't reduce supplier's wholesale prices. Therefore, in consideration of the supplier's decisions, unless the network externalities are very strong, otherwise, a royalty license is the optimal strategy for innovator. When the network externalities are very strong, due to greater new product market share, a fixed license can improve the network externality effects. Then, even if no gains from supplier's pricing, the fixed licensing strategy is better than the royalty licensing strategy.Then, extending the network externality characteristic, we analyze the licensing strategies under two-period network externalities and two-sided network externalities respectively. Among them, in chapter 4, by establishing a two-period dynamic game model, we explore the optimal licensing strategies under two-period network externalities. We show that under two-period network externalities, the innovator can use the ex ante licensing strategy in the first period as a credible commitment, which can promote the company in the first period expand customer base from the perspective of maximizing two-period gross profits. Ex ante licensing strategy can fully utilize the network externality effect, dampen the"external diseconomy", and realize pareto improvement for innovator and the licensee. Specifically, the ex ante licensing strategy with royalty is optimal, and the ex ante licensing strategy with fixed fee can't give innovators any more profits than no-licensing strategy. In Chapter 5, we explore how the two-sided network externalities, the number of potential licensees and the potential demand affect the technology licensing strategies of innovator under two-side network externalities. We analyze the conditions on which entry is (not) restricted in the fixed fee licensing strategy and the conditions on which the innovator subsidizes the licensees, and then we compare the fixed fee strategy and the royalty strategy. We find that in general the fixed fee regime dominate the royalty regime, but with strong two-sided network externalities, more potential licensees and relatively small potential demand in the licensed products market, the innovator may subsidize the patentees under the royalty regime and the subsidizing strategy may dominate the fixed fee licensing strategy.Finally, introducing the factors of competitive and complementary relationship in the technology market, we analyze the licensing strategies of competitive technologies and complementary technologies under the network externalities respectively. Among them, in chapter 6, we explore the impact of network externalities and technology competition on the innovators'licensing strategy. We show that under fixed fee licensing strategy, when the network externalities is weak relative to the intensity of competition, innovators won't like to licensing out technology, and when the network externalities is strong compared with the intensity of competition, innovators will licensing out technology. We compare independent license with colluded license in terms of promoting technology diffusion. When each innovator licensing independently, network externalities and technology competitiveness can substitute with each other, that is, for strong technology competition, each innovator is willing to license his technology even though the network externalities are weak. When innovators colluding in the licensing numbers, network externalities and technology competitiveness can't substitute with each other, that is, for strong technology competition, each innovator is willing to license his technology only if the network externalities are strong. In the environment of network externalities and technology competition, innovators tend to collude in the licensing numbers. Compared with independent licensing strategy, the colluded licensing strategy reduces innovators'probability and the numbers of technology licensing. In chapter 7, we explore the impact of network externalities on licensing strategies considering complementary technology and asymmetry in the vertical structure among innovators. According to the dimension of independent licensing or patent pool, and the dimension of open licensing or closed licensing, we explore four strategies such as: open-independent licensing, open patent pool, closed patent pool and closed-independent licensing. We show that for the internal innovator and industrial administrator, open patent pool is the optimal strategy, but not for the external innovator. Under weak network externalities, the external innovator tends to select the closed patent pool. Under strong network externalities, the external innovator tends to select open-independent licensing strategy. In order to induce the external innovator make decisions from the point of innovators'total profit maximization, a compensation mechanism from internal innovator to external innovator needs to be established. We propose an ex ant fixed fee licensing mechanism. We show that under this mechanism, open patent pool is the rational choice which both the internal and the external innovator can accept.Our study is a complement to present research of licensing strategies under network externalities, and gives some new insights for innovator's decisions on technology licensing strategies. The main innovation of our study lies in:(1) In current research literatures of technology licensing, the studies that simultaneously focus on both factors of network externalities and innovation level are relatively few. Among a few related research literatures, the studies considering the fulfilled expectation equilibrium are relatively few. Based on the fulfilled expectation equilibrium, we analyze the optimal licensing strategies for internal innovator considering the network externalities and innovation level simultaneously, and identify the optimal licensing strategies for the innovator. Our research is a complement to current studies of technology licensing strategy under network externalities.(2) Current researches on technology licensing technology are mainly from the level of competition in industry, and focus on the impact of licensing technology to the competition in industry. The studies from the level of supply chain are relatively few. Among some studies that considering the decisions of suppliers, there is relatively little discussion on network externalities. We explore the impact of network externalities and supplier pricing on the innovator's technology licensing strategy, and focus on the vertical efficiency improvement through technology licensing. Then, we identify the optimal licensing strategies for the innovator.(3) Extending the characteristics of network externalities, we identify the optimal licensing strategies of innovaor under two-period network externalities and two-sided network externalities respectively. Among current research literatures, the quantitative researches on technology licensing strategies under network externalities between two markets are relatively few. Our research is the extension of current research on technology licensing strategy under network externalities.(4) Current quantitative researches on technology licensing strategy are mainly on the assumption that the innovator monopolizes the market for technology. There are relatively little quantitative discussion on the competitive and complementary relationship in the market for technology and their impacts on technology licensing under network externalities. We compare the independent licensing and colluded licensing under network externalities and technology competition, which is a complement to the research of licensing strategies for competitive technology. We also explore the impact of network externalities on licensing strategies considering complementary technology and asymmetry in the vertical structure among innovators. We compare four strategies such as: open-independent licensing, open patent pool, closed patent pool and closed-independent licensing. The optimal licensing strategies for internal innovator and external innovator are identified, and a compensation mechanism of fixed license fee from the internal innovator to the external innovator is proposed. This research is a complement to the research of licensing strategies for complementary technology.