Technology Sharing Strategies for New Product Diffusion With Consideration of Firms’ Risk Aversion

Abstract

This article examines the effects of risk aversion on the incentive for an incumbent to share its new technology with a potential entrant. While competition emerges with technology sharing, the involvement of additional firm in the development of the new-technology-based products increases the lowest willingness to pay (LWTP) of consumers for the products. A game-theoretic model is developed to analyze the two-firm competition. Results show that asymmetric risk preferences of firms can lead to their asymmetric competitive advantages (or disadvantages), which increase (decrease) the quantity of products offered by the less risk-averse firm (the more risk-averse firm) under high product substitutability. Generally, the more risk-averse the incumbent is, the more likely it is to freely share its technology; however, if competitive disadvantage exists for the entrant, then the less risk-averse incumbent is more likely to share. Moreover, the incumbent earns more (less) from licensing than from wholesaling when it is substantially less (more) risk averse than the entrant. Interestingly, while the enhancement in the consumers’ LWTP generally promotes technology sharing, it may restrain the lowly risk-averse incumbent from wholesaling to the highly risk-averse entrant in that the first-mover advantage of the entrant can mitigate its competitive disadvantage.