Licensing and price competition in tied-goods markets: An application to the single-serve coffee system industry

Pradeep K. Chintagunta, Marco Shaojun Qin, Maria Ana Vitorino

Research output: Contribution to journalArticlepeer-review

4 Scopus citations

Abstract

We develop a structural model of demand and supply for tied goods, which we estimate using aggregate data from the single-serve coffee system industry. We use the parameter estimates to quantify the impact of licensing on equilibrium prices and profits for firms in the industry. In particular, we look at the decision to allow other firms to sell components (coffee pods) that are compatible with a firm’s primary good (coffee machines) by licensing the use of its patents. We solve for the counterfactual market equilibrium in which one of the market leaders enters a licensing agreement with one of the competitor brands—with the latter brand only selling compatible coffee pods and not the machines. We show the existence of a range of royalty rates under which firms could potentially reach a beneficial licensing agreement. In addition, we find that the relationship between the licensee’s profits and the royalty rate is not always decreasing. Finally, we find that, within the set of royalty rates in which licensing benefits both brands, the licensing agreement is associated with less price dispersion in the aftermarket (coffee pods), and with lower prices of the primary good (coffee machines) relative to the nonlicensing scenario.

Original languageEnglish (US)
Pages (from-to)883-911
Number of pages29
JournalMarketing Science
Volume37
Issue number6
DOIs
StatePublished - Nov 1 2018

Bibliographical note

Funding Information:
P. K. Chintagunta received financial support from the Kilts Center for Marketing at the Booth School of Business. M. A. Vitorino received financial support from the Dean’s Small Grants Program at the University of Minnesota Carlson School of Management.The authors thank Frederico Belo, Thomas Holmes, George John, Hongju Liu, Linli Xu, Yi Zhu, and the conference discussant Lingling Zhang for helpful comments and suggestions. They also thank the participants of the Applied Micro Workshop at the University of Minnesota, the 2014 Marketing Science conference (Emory University), the 2016 Haring Symposium (University of Indiana), and the 2016 Marketing Dynamics Conference (Hamburg). They specifically thank Gautam Gowrisankaran, Marc Rysman, and Timothy Derdenger for clarifications related to their work and helpful responses. They are grateful to Rita Duarte and Daniel Mota from DeltaQ for sharing their insights about the industry, and to GfK Portugal for providing authorization to use their data. They thank Arthur Middlebrooks, the Executive Director of the Kilts Center for Marketing, and the Nielsen Company for providing some of the data used in the estimation. Lastly, they are indebted to the editor, associate editor, and reviewers for their valuable feedback during the review process. All errors are their own.

Publisher Copyright:
© 2018 INFORMS.

Keywords

  • Demand and supply estimation
  • Licensing
  • Single-serve coffee systems
  • Tied goods

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