Supply Licensing When the Manufacturer Strategically Commits to Invest in R&D

19 Pages Posted: 15 Feb 2014 Last revised: 18 Sep 2020

See all articles by Mericcan Usta

Mericcan Usta

Stanford University - Department of Management Science & Engineering

Feryal Erhun

University of Cambridge - Judge Business School

Warren H. Hausman

Stanford Graduate School of Business

Date Written: May 4, 2014

Abstract

This paper proposes a strategic reason for a proprietary component supplier to license her technology to a competitor or a manufacturer: her anticipation of the manufacturer's strategic commitment to invest in research and development (R&D). We address this phenomenon with a game theoretic model. Our results show that the manufacturer's full commitment to invest in R&D enables the supplier to license, sell a larger quantity through the supply chain, and charge lower prices than the manufacturer's full commitment not to invest in R&D. These results are robust to the type of demand uncertainty faced by the manufacturer within the class of increasing generalized failure rate (IGFR) distributions.

Keywords: R&D strategy, strategic sourcing, strategic licensing

JEL Classification: C44, D45, O32

Suggested Citation

Usta, Mericcan and Erhun, Feryal and Hausman, Warren H., Supply Licensing When the Manufacturer Strategically Commits to Invest in R&D (May 4, 2014). Stanford University Graduate School of Business Research Paper No. 14-03, Available at SSRN: https://ssrn.com/abstract=2396090 or http://dx.doi.org/10.2139/ssrn.2396090

Mericcan Usta (Contact Author)

Stanford University - Department of Management Science & Engineering ( email )

473 Via Ortega
Stanford, CA 94305-9025
United States

HOME PAGE: http://www.stanford.edu/~usta

Feryal Erhun

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Warren H. Hausman

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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