Strategic Trading Partner Selection for an Upstream Licenser

This paper examines the determinant of trading partner selection for a licenser. The licenser negotiates with either a downstream incumbent which has its own production facility (the outside option) or a downstream entrant, and determines a two-part tariff for licensing. If the licenser trades with the entrant (the incumbent), the downstream market becomes a duopoly (monopoly). We find that the licenser’s bargaining power over the incumbent does not influence the licenser’s decision on its trading partner although that over the entrant, its marginal costs of licensing to the entrant and the incumbent, and the incumbent’s outside value matter for its decision