Production Timing and Technology Licensing Under Competition and Demand Uncertainty

Abstract-Motivated by technology licensing practices in emerging technology industries with high demand uncertainty, we investigate firms' production timing decisions and technology licensing strategies in a supply chain consisting of two original equipment manufacturers (OEMs) and a common supplier. Both manufacturers source their key components from the common supplier, and the innovative manufacturer can license its quality-improving technology to the supplier. Considering the demand variability of quality-improving innovation, firms may adopt an ex-post production scheme (PS) to avoid market risk and choose an ex-ante production scheme (AS) to obtain market leadership. Our findings reveal that firms' production timing and technology licensing decisions depend on the demand variability and the market potential difference. Interestingly, if a low-quality manufacturer implements AS, the innovative manufacturer may benefit from AS under no licensing. However, neither firm will obtain more benefits if both implement AS under technology licensing. When the innovative manufacturer adopts AS and its competitor adopts PS, the technology licensing will hurt the common supplier. Technology licensing makes low-quality OEMs more cautious and prefer PS, while high-quality OEMs are more aggressive and prefer AS. Moreover, the innovative OEM and supplier can reach a technology licensing agreement when the difference in market potential is greater than a small threshold. The intensity of competition among two manufacturers will raise the threshold for technology licensing. The extended model of innovation costs and licensing fees verifies the robustness of production timing decisions and licensing strategy choices. Our study provides novel insights and contributes to the growing literature on technology licensing under demand uncertainty. licensing to the supplier may unintentionally reduce overall supply chain profit, especially when both OEMs choose AS. Managers of low-quality OEMs are advised to adopt ex-post production (PS) to hedge against market risk, especially when facing technology licensing. For suppliers, strategic acceptance or refusal of licensing contracts should be based on the specific combination of OEMs' timing strategies. Therefore, engineering leaders must jointly consider demand volatility, competition intensity, and partner behaviour to decide production timing that maximize long-term value across the supply chain.