New product design decisions and free sharing of patents with rivals

Abstract

Intrigued by observations in the automobile industry where some firms share their new battery technologies with their competitors, we consider the problem where an innovator firm, that owns a novel technology, licenses it to a rival firm that uses the conventional technology to manufacture an existing product. The rival firm uses the licensed technology to develop a new product to compete with the innovator firm in the downstream market. We address the innovator firm’s pricing issue of the new technology licence and characterize the design features of the new product the rival firm develops using the licensed technology. We show that under specific conditions, it makes sense for the innovator firm to license its technology free of charge to the rival firm. We conduct numerical studies to examine the impact of the model parameters on the optimal outcomes and generate some practical insights.

Keywords:

• product design and development
• new technology licensing
• network effect
• electric vehicles
• hybrid cars
• sustainable technologies
• free sharing
• patents

Acknowledgments

We thank the Editors and anonymous referees for their many helpful comments on earlier versions of our paper. Hazra was supported in part by Indian Institute of Management Bangalore under IIMB Chair of Excellence. Cheng was supported in part by The Hong Kong Polytechnic University under the Fung Yiu King - Wing Hang Bank Endowed Professorship in Business Administration.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Please note that throughout the paper, the innovator we refer to is the firm that owns the new technology. Furthermore, the rival is the firm that competes with the innovator in the downstream market. The rival also introduces a new product based on the innovator’s new technology, for which it pays the licensing fee to the innovator.

2 Electric and hybrid vehicle manufacturers are working with federal and state governments, and third-party infrastructure developers to scale up the charging network in the regions where such vehicles are sold. These joint efforts between the vehicle manufacturers, government, and infrastructure players ensure that electric vehicle owners have easy access to charging stations (White House press release, 2016). For example, Electricite de France (a utility company) and Toyota joined forces to install charging infrastructure in France through a technology partnership (Enbysk, 2014). Therefore, in our paper, we assume that the charging infrastructure keeps pace with new technology vehicle sales.

3 Please note that the downstream market parameter R may be estimated using discrete choice models. This requires data on customer maximum willingness to pay or historical customer choice datasets, historical price data, product features data, etc. We refer readers to Houde (2012), Goettler and Shachar (2001), and Besanko et al. (2003) for the details on the parameter estimation in such structural models.

4 We provide the expression of the threshold value of R above which the market is fully covered in Appendix A of the online supplement of the paper.