To license or not: the case of a new information technology product

A firm with a new Information Technology (IT) product may consider licensing it to firms in the same industry or other industries. The impact of the new product on the operating costs of the firms is usually uncertain. The costs may increase or decrease as a result of the new product. Once the new IT product is used for some time, however, firms come to know the actual cost impact. WE develop a duopoly two-period model with one firm owning a new IT product. We consider two licensing options: (1) one-time licensing for both periods at the beginning of the first period, (2) period-by-period licensing. With the first option, no licensing occurs for very low and very high expected values of cost reduction; otherwise, licensing may occur. For high expected values of cost reduction, the licensor prefers period-by-period licensing to licensing only once at the beginning of the first period for both periods. For low expected values, the licensor is indifferent between the two options and for very low expected values, the licensor again uses the second option, i.e., it licenses at the beginning of each, period