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Monopoly incentives to license a product with network externalities

Author: Kende, Michael INSEAD Area: Economics and Political Science Series: Working Paper ; 93/74/EPS Publisher: Fontainebleau : INSEAD, 1993.Language: EnglishDescription: 20 p.Type of document: INSEAD Working Paper Online Access: Click here Abstract: This paper shows the effects on profits and consumer surplus of a monopolist licensing a good from which consumers derive network externalities. Licensing a proprietary technology increases the output and thus the network of the licensed good. By credibility committing to licensing in the future, the monopolist increases current sales and profits at the expense of future monopoly profits. The increase in current profits can outweigh the loss of future profits. If a credible commitment to future licensing is not possible, in some cases licensing beginning in the current period can also increase the licensor's profits. In all cases licensing, by increasing the size of the network of the compatible goods, increases consumer surplus
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This paper shows the effects on profits and consumer surplus of a monopolist licensing a good from which consumers derive network externalities. Licensing a proprietary technology increases the output and thus the network of the licensed good. By credibility committing to licensing in the future, the monopolist increases current sales and profits at the expense of future monopoly profits. The increase in current profits can outweigh the loss of future profits. If a credible commitment to future licensing is not possible, in some cases licensing beginning in the current period can also increase the licensor's profits. In all cases licensing, by increasing the size of the network of the compatible goods, increases consumer surplus

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