Entry, licensing and research joint ventures

Abstract

Consider an incumbent monopolist faced with potential competitors who can enter the market by developing a substitute, but inferior, technology. What is the incumbent's optimal licensing policy? When, to whom, and under what conditions should the incumbent firm license its superior technology? Can the incumbent firm reduce the threat of entry by using its licensing policy strategically? If so, can the potential entrants counter the incumbent's strategic use of licensing by forming a research joint venture among themselves? This paper provides a detailed analysis of these issues in a model with two potential entrants.