A game theoretic simulation approach on innovative startups' decision process routine: Own marketing vs. licensing

Abstract

When a startup develops a newer ubiquitous innovation through information science thanincumbents’ current technologies, two strategies are available. It can either take advantage ofthe innovation for its own sake, i.e. own marketing, by creating a new differentiated market orcan license the innovation to an incumbent.Two fundamental conflicts lie in licensing: what ifa non-best technology is transferred and what if the licensee does not fully compensate for thestartup. In one-shot game, the entrepreneurial startup does not release its best technology, i.e.,new innovation; rather it sells a non-best technology only. As a compensation scheme, only alump-sum payment is considered as the imitation cost of the new innovation, done withinformation science, is low. In contrast, the startup shows a different decision making in a repeated game. In that, the startup’s new innovation can have a PLC (product life cycle)until creative destruction interrupts the new innovation.This produces some important results.First, the length of the PLC is positively associated with the likelihood to transfer the besttechnology. Second, a patient entrepreneur would be more likely to transfer the besttechnology. Third, the superior the startup’s new innovation is, the best technology is morelikely to be transferred. A discrete-choice simulation supports these main findings concretely,which conclude that the startup’s best technology can be transferred in a finitely repeatedframework. The startup’s tolerance on its discounted payoff and the PLC of the newinnovation play important roles in the startup’s strategic decision process between own marketing and licensing.