Licensing Under Network Externalities

This paper develops a duopoly model to explore licensing behaviour in the presence of network externalities. Under the assumption that the licensor and the licensee compete in a duopolistic market, we obtain the following results. First, the larger the network-externality effect, the more likely it is that the licensor will prefer fixed-fee licensing to royalty licensing. Second, the larger the network-externality effect, the more likely it is that the optimal royalty rate will be smaller than the reduction in marginal costs from innovation under a royalty licensing arrangement.