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Licensing and the battle between standards

Author: Kende, Michael INSEAD Area: Economics and Political Science Series: Working Paper ; 95/47/EPS Publisher: Fontainebleau : INSEAD, 1995.Language: EnglishDescription: 24 p.Type of document: INSEAD Working Paper Online Access: Click here Abstract: This paper considers the competition between reval incompatible systems composed of hardware and complementary software, and models a strategy commonly used by developers of hardware standards, the licensing of technology to third-party firms. Licensing acts as a commitment to lower hardware prices, which increases the willingness of software developers to sink money into development of software for the licensed technology. The resulting increased software availability in turn increases hardware adoption. Results show that licensing is profitable when software development costs are relatively low and when only one firm licenses. Hence there exists a coordination game, the result of which is a mixed-strategy licensing equilibrium, where consumer surplus and total welfare increases, while total profits fall
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This paper considers the competition between reval incompatible systems composed of hardware and complementary software, and models a strategy commonly used by developers of hardware standards, the licensing of technology to third-party firms. Licensing acts as a commitment to lower hardware prices, which increases the willingness of software developers to sink money into development of software for the licensed technology. The resulting increased software availability in turn increases hardware adoption. Results show that licensing is profitable when software development costs are relatively low and when only one firm licenses. Hence there exists a coordination game, the result of which is a mixed-strategy licensing equilibrium, where consumer surplus and total welfare increases, while total profits fall

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