Optimal license fees for a new product (Q1102847)

We compare how much profit an inventor of a patented new `superior' product can realize by licensing its manufacture, for a fixed fee, to an oligopolistic industry producing an `inferior' substitute. Our analysis is conducted in terms of a three stage noncooperative game involving \(n+1\) players: the inventor, acting as Stackelberg leader, and the n firms. Analysis of subgame perfect equilibria in pure strategies of this game disclose the circumstances under which an inventor's optimal behavior ultimately leads to production of both products and when it follows for the production of the `superior' product only. An extreme case of the latter possibility, namely when the `superior' is produced by a monopolist, is characterized also.