Product Strategy for Innovators in Markets with Network Effects

Baohong Sun, Jinhong Xie () and Huining Cao ()
Additional contact information
Jinhong Xie: Warrington College of Business Administration, University of Florida, Gainesville, Florida 32616

Marketing Science, 2004, vol. 23, issue 2, 243-254

Abstract: This paper examines four alternative product strategies available to an innovating firm in markets with network effects: single-product monopoly, technology licensing, product-line extension, and a combination of licensing and product-line extension. We address three questions. First, what factors affect the attractiveness of each of the four product strategies? Second, under what conditions will any particular strategy dominate the others? Third, what is the impact of licensing fees on the profitability of a licensing strategy? We show that offering a product line utilizes consumer heterogeneity to increase the total user base and is superior to free licensing when the innovator's cost of producing a low-quality product is low and network effects are weak. However, because of the advantage of licensing in generating a larger installed base, free licensing can dominate line extension when network effects are strong, even if the innovator suffers no cost disadvantage compared to the competitor. We also show that paid licensing trumps free licensing when the clone product has a high quality or a low cost, regardless of network effect. Finally, strong network effects make a lump-sum fee more profitable than a royalty fee (or a combination of both) because a royalty fee reduces the licensee's production.

Keywords: network effects; new product strategy; innovation management; licensing; product line; competitive strategy; technological standards; installed base (search for similar items in EconPapers)
Date: 2004
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (50)

Downloads: (external link)
http://dx.doi.org/10.1287/mksc.1040.0058 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormksc:v:23:y:2004:i:2:p:243-254

Access Statistics for this article

More articles in Marketing Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().