The optimal technology licensing strategy under supply disruption

Abstract

We study the problem of whether and how a patent-holding firm (supplier S1) should license its technology patent to a potential rival (supplier S2). If the license is given, the two suppliers both produce a critical component for their downstream manufacturer simultaneously (sequentially) when the manufacturer adopts a dual (contingent) sourcing mode. However, both suppliers face risks of complete supply disruptions. In the study, we examine how the supply risk affects S1's technology licensing willingness and under which conditions royalty or fixed-fee licensing is its optimal strategy. The results show that when the manufacturer adopts contingent sourcing, S1 is always willing to license its technology to S2 and fixed-fee licensing is the optimal strategy. However, when dual sourcing is adopted, either royalty and fixed-fee licensing could be S1's optimal licensing strategy, depending on the reliability degree of the suppliers’ productions. Our findings extend the conclusion from previous researchers about royalty and fixed-fee licensing in a Cournot duopoly model.

Keywords:

• technology licensing
• supply disruption
• dual sourcing
• contingent sourcing

Disclosure statement

No potential conflict of interest was reported by the authors.

ORCID

Sheng Ang http://orcid.org/0000-0003-2434-277X

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [grant number 71631006], [grant number 71601173]; National Soft Science Research Program [grant number 2013GXS1D006]; Philosophy and Social Science Project of Anhui Province [grant number AHSKY2014D28]; Fundamental Research Funds for the Central University [grant number WK2040160025].