Definition
:
Rent the rights to
something (e.g. patent, brand name) to another
firm in exchange for some form of payment.
Forms of
payment :
- Royalty e.g. € / unit,
% of sales, etc)
- Fixed fees (e.g. per year,
etc.)
- Rights (to technology, product,
etc.)
Advantages & Disadvantages
of licensing :
| Advantages |
Disadvantages
|
Eliminates
entry costs |
Low profits |
| Low downside
risk |
Incentive problems |
Low
uncertainty |
Contracting
costs & monitoring |
| Modest return
obtained via pricing |
Does not establish your firm
in the market |
| Modest return
obtained in small markets |
Learning device for licence |
| Fast, and low uncertainty |
|
Less agressive
mode, less agressive response |
|
Preempt
imitative behaviour |
|
Get around
trade barriers |
|
| No organizational change
is requiered |
|
Sources :
Strategic Management, Raphael Amit, Professor at Wharton University of Pennsylvania, US
A Transaction Cost Theory of Equity Joint Venture, Strategic Management. Journal, F.J. Hennart, SMJ, 1988
(c) ECOFINE.COM, Bernard Jaquier, Professor in Economics and Finance, Switzerland, 2020
