Luís Almeida Costa and Ingemaar Dierickx

"Licensing and bundling"
JEL codes: L12, L14, O32
Keywords: licensing, bundling, innovation, vertical differentiation

Abstract: A common problem in licensing contacts is that contractual language does not necessarily guarantee that the license will effectively be exclusive. The practical difficulty is that the licensor may be able to invent around this restriction. We show that commodity bundling may provide a mechanism for the innovating firm to credibly commit to act less aggressively after licensing a product innovation. As a result, bundling and licensing may be complementary strategies. Even if the innovating firms does not have the incentive either to license or to bundle, it may still have the incentive to follow a licensing plus bundling strategy. We identify a second remedy for the licensor's commitment problem: a royalty. We show that, under certain conditions, a royalty may be used as a commitment device enabling the licensor to credibly - and costlessly - establish exclusivity.