LICENSEES AS ENTRY BARRIERS

In a more general setting than has been considered hitherto, this pape r examines how the incumbent in a market threatened by entry can explo it its first-mover advantage by licensing its technology not to a pote ntial entrant but to firms that would have remained outside the indust ry. It is shown, among other things, that the incumbent may subsidize the variable costs of its licensees in order to deter entry. Even when entry is not deterred, it is demonstrated that the incumbent might op t to invite outsiders as licensees.