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The Scientific World Journal
Volume 2014, Article ID 437919, 12 pages
http://dx.doi.org/10.1155/2014/437919
Research Article

The Optimal Licensing Contract in a Differentiated Stackelberg Model

1School of Economics and Management, Hubei University of Automotive Technology, Shiyan 442002, China
2School of Management, Huazhong University of Science & Technology, Wuhan 430074, China
3Antai College of Economics & Management, Shanghai Jiao Tong University, Shanghai 200052, China

Received 26 September 2013; Accepted 9 December 2013; Published 10 February 2014

Academic Editors: V. Desai and T. Tuma

Copyright © 2014 Xianpei Hong et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

This paper extends the work of Wang (2002) by considering a differentiated Stackelberg model, when the leader firm is an inside innovator and licenses its new technology by three options, that is, fixed-fee licensing, royalty licensing, and two-part tariff licensing. The main contributions and conclusions of this paper are threefold. First of all, this paper derives a very different result from Wang (2002). We show that, with a nondrastic innovation, royalty licensing is always better than fixed-fee licensing for the innovator; with a drastic innovation, royalty licensing is superior to fixed-fee licensing for small values of substitution coefficient d; however when d becomes closer to 1, neither fee nor royalty licensing will occur. Secondly, this paper shows that the innovator is always better off in case of two-part tariff licensing than fixed-fee licensing no matter what the innovation size is. Thirdly, the innovator always prefers to license its nondrastic innovation by means of a two-part tariff instead of licensing by means of a royalty; however, with a drastic innovation, the optimal licensing strategy can be either a two-part tariff or a royalty, depending upon the differentiation of the goods.