Research

The authors present two classroom experiments on technology licensing. The first classroom experiment introduces the concept of royalty stacking. Students learn that non-cooperative pricing of royalties for complementary intellectual property rights leads to a double-marginalization effect. Cooperation solves the problem and is welfare-improving. The second classroom experiment introduces students to cross-licensing. It shows that reciprocal royalty payments dampen competition. The classroom experiments stimulate discussions of technology licensing, intellectual property rights, different royalty structures, patent pools and technology standards. The authors present the experimental procedures, and suggests routes for the discussion.

Digital platforms are technology intensive and often require access to intellectual property rights. As those rights are often owned by competing platforms, we observe cross-licensing contracts between them. Cross-licensing facilitates the sharing of technologies, leading to less duplication of resources and equal access to technology---facilitating competition on equal terms. Yet the economic literature has traditionally been worried for the anti-competitive effects of cross-licensing in the presence of monetary transfers in traditional (one-sided) markets, since a positive royalty essentially raises the rival's costs, leading to higher prices. Through a two-sided platform model, I show that positive royalties in cross-licensing contracts in two-sided markets have two opposing effects: the competition effect and the two-sided effect. The two-sided effect alleviates the anti-competitive effects, and may even flip the outcome. Under strong network effects, the two-sided effect of cross-licensing contracts may in fact dominate, leading to lower prices. The results suggest that policymakers should be less concerned about competition harm associated with cross-licensing contracts in markets with strong network effects.

We address the impact of targeting through the use of first-party data and consumer multi-homing on platform competition and market equilibria in two-sided markets. We analyze platforms that are financed by both advertising and subscription fees, and let them adopt a targeting technology with increasing performance in audience size: a larger audience generates more consumer data, which improves the platforms' targeting ability and allows them to extract more advertising revenue. Targeting therefore increases the importance of attracting consumers. Previous literature has shown that targeting could result in fierce price competition if consumers subscribe to only one platform (i.e., single-home). Surprisingly, we find that pure single-homing possibly does not constitute a subgame-perfect Nash equilibrium. Instead, platforms might rationally set prices that induce consumers to subscribe to more than one platform (i.e., multi-home). With multi-homing, a platform's audience size is not restricted by the number of subscribers on rival platforms. Hence, targeting softens the competition over consumers. We show that this result could imply that equilibrium profit is higher with than without targeting, in sharp contrast to the predictions given in previous literature. 

Individual retailers may choose to invest in a substitute to a dominant supplier’s products (inside option) as a way of improving its position towards the supplier. Given that a large retailer has stronger investment incentives than a small retailer, a large retailer may obtain a selective rebate (size-based price discrimination). We study the incentives of dominant suppliers to commit to uniform pricing in wholesale markets. The seminal literature on wholesale price discrimination has provided clear-cut results when the source of wholesale price discrimination is inside options: a dominant supplier will commit to uniform wholesale pricing, and consumers will be harmed. In a model with endogenous inside options and differentiated retailers, we show that the outcome is ambiguous. We confirm the result if retailers are close substitutes. If, however, the retailers are weak substitutes, the outcome flips around. Consumers are better off under uniform pricing, but the supplier has no incentives to commit to uniform pricing. Interestingly, for an intermediate level of substitutability among the retailers, supplier and consumer interests can coincide.