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 than incumbents' current technologies, two strategies are available. It can either take advantage of the innovation for its own sake, i.e. own marketing, by creating a new differentiated market or can license the innovation to an incumbent. T wo fundamental conflicts lie in licensing: what if a non-best technology is transferred and what if the licensee does not fully compensate for the startup. 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 a lump-sum payment is considered as the imitation cost of the new innovation, done with information 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 best technology . Second, a patient entrepreneur would be more likely to transfer the best technology. Third, the superior the startup' s new innovation is, the best technology is more likely 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 repeated framework. The startup' s tolerance on its discounted payoff and the PLC of the new innovation play important roles in the startup' s strategic decision process between own marketing and licensing.