Partial Licensing of Product Innovations ∗

We study the incentives of a product innovator to license its product “partially” to a potential entrant. In a duopolistic setting we consider product design of a modular nature, which enables the incumbent to license some modules of its innovation. Competition is characterized by the size of the shared component of the product which determines the degree of product differentiation. Therefore, by choosing how much to license, i.e., the size of the license, the innovator chooses how much to compete. In a general setting, we provide sufficient conditions for partial licensing to occur, and then we use a specific competitive setting and show that the size of the license increases when i) the entrant has a higher development cost to complete the product, and ii) the marginal effect of the size of the license on product differentiation is lower.