Licensing and bundling

A common problem in licensing contracts is that contractual language does n ot necessarily guarantee that the license will effectively be exclusive. Th e practical difficulty is that the licensor may be able to invent around th is restriction. We show that commodity bundling may provide a mechanism for the innovating firm to credibly commit to act less aggressively after lice nsing a product innovation. As a result, bundling and licensing may be comp lementary strategies. Even if the innovating firm does not have the incenti ve either to license or to bundle, it may still have the incentive to follo w a licensing plus bundling strategy. We identify a second remedy for the l icensor's commitment problem: a royalty. We show that, under certain condit ions, a royalty may be used as a commitment device enabling the licensor to credibly - and costlessly - establish exclusivity. (C) 2002 Elsevier Scien ce B.V. All rights reserved.