New product design decisions and free sharing of patents with rivals

Intrigued by observations in the automobile industry where some firms share their new battery technologies with their competitors, we consider the problem where an innovator firm, that owns a novel technology, licenses it to a rival firm that uses the conventional technology to manufacture an existing product. The rival firm uses the licensed technology to develop a new product to compete with the innovator firm in the downstream market. We address the innovator firm’s pricing issue of the new technology licence and characterize the design features of the new product the rival firm develops using the licensed technology. We show that under specific conditions, it makes sense for the innovator firm to license its technology free of charge to the rival firm. We conduct numerical studies to examine the impact of the model parameters on the optimal outcomes and generate some practical insights.