Abstract

This paper deals with R&D investment and technology licensing in a supply chain formed of an original equipment manufacturer (OEM) and a contract manufacturer (CM). The R&D is conducted by the CM and the OEM agrees to pay a share of the cost. At the R&D stage, we assume that there are some uncertainties both in terms of performance of the developed technology and market uncertainties. These uncertainties are resolved in the sales stage, as technology matures and information about consumers’ preferences become available. Further, the OEM can license the technology to a third party and share the revenues with the CM. We characterize equilibrium pricing and licensing strategies in two scenarios, namely, the licensing decision is made before or after the uncertainties are resolved. A comparison of the two equilibria indicates that the OEM is indifferent between making the licensing decision in the first or the second stage in most cases. But when the market potential, competition intensity, royalty rate and revenue sharing rate are moderate, there exists a small region in the parameter space where the OEM prefers to make the licensing decision in Stage 2. Interestingly, we obtain that for a large region of the parameter space, the two partners have the same preferences in terms of licensing. It is also found that different probability distribution of stochastic technology efficiency results in different licensing strategies.

Introduction

Cooperation in research and development (R&D) is popular among technology-intensive firms pursuing time and cost reduction, better product design, and higher quality objectives (Albino, Carbonara, & Giannoccaro, 2007). Coordinated investment in R&D is often preferred to competitive investment because: (i) it achieves higher economics of scale and scope; (ii) it reduces risk and wasteful duplication of R&D efforts; and (iii) it leads to higher total investments, and therefore higher knowledge, as appropriability and free riding are no more an issue (Ge & Hu, 2008; Harabi, 2002).