This paper deals with R&D investment and technology licensing in a supply chain formed of an original equipment manufacturer (OEM) and a contract manufacturer (CM). The R&D is conducted by the CM and the OEM agrees to pay a share of the cost. At the R&D stage, we assume that there are some uncertainties both in terms of performance of the developed technology and market uncertainties. These uncertainties are resolved in the sales stage, as technology matures and information about consumers' preferences become available. Further, the OEM can license the technology to a third party and share the revenues with the CM. We characterize equilibrium pricing and licensing strategies in two scenarios, namely, the licensing decision is made before or after the uncertainties are resolved. A comparison of the two equilibria indicates that the decision of licensing, that is, licensing or not, and its timing depend on the level of royalty from licensing and the share of each partner in these revenues. Interestingly, we obtain that for a large region of the parameter space, the two partners have the same preferences in terms of licensing. It is also found that different probability distribution of stochastic technology effectiveness results in different licensing strategies.
Published June 2017 , 22 pages