Licensing and Price Competition in Tied-Goods Markets: An Application to the Single-Serve Coffee System Industry

Pradeep Chintagunta, Marco Shaojun Qin () and Maria Ana Vitorino ()
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Marco Shaojun Qin: Fox School of Business, Temple University, Philadelphia, Pennsylvania 19122
Maria Ana Vitorino: Fox School of Business, Temple University, Philadelphia, Pennsylvania 19122; INSEAD, 77305 Fontainebleau, France; Carlson School of Management, University of Minnesota, Minneapolis, Minnesota 55455

Marketing Science, 2018, vol. 37, issue 6, 883-911

Abstract: We develop a structural model of demand and supply for tied goods, which we estimate using aggregate data from the single-serve coffee system industry. We use the parameter estimates to quantify the impact of licensing on equilibrium prices and profits for firms in the industry. In particular, we look at the decision to allow other firms to sell components (coffee pods) that are compatible with a firm’s primary good (coffee machines) by licensing the use of its patents. We solve for the counterfactual market equilibrium in which one of the market leaders enters a licensing agreement with one of the competitor brands—with the latter brand only selling compatible coffee pods and not the machines. We show the existence of a range of royalty rates under which firms could potentially reach a beneficial licensing agreement. In addition, we find that the relationship between the licensee’s profits and the royalty rate is not always decreasing. Finally, we find that, within the set of royalty rates in which licensing benefits both brands, the licensing agreement is associated with less price dispersion in the aftermarket (coffee pods), and with lower prices of the primary good (coffee machines) relative to the nonlicensing scenario.

Keywords: tied goods; demand and supply estimation; licensing; single-serve coffee systems (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormksc:v:37:y:2018:i:6:p:883-911

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