The optimal licensing strategy and commission in a software platform ecosystem with software content upgrades

Abstract

AbstractA licensing commission policy can be used as a tool to orchestrate an ecosystem with complementary developers. For instance, Apple attempts to take advantage of a licensing‐related commission strategy. However, its economic mechanism is seldom discussed. Therefore, this study developed a framework of a platform ecosystem in order to analyze the economics of the licensing‐related commission strategy and the optimal licensing choice with the software function and content upgrade in a monopoly/duopoly market setting. We find that the commission rate serves not only as a value transfer instrument but also as a value‐creation incentive machine for the ecosystem with third‐party vendors. Further, by considering the above factors, the platform would use a win‐win commission rate that benefits both parties. We also find that the differential commission rate has a stronger extraction effect, but it may not result in a vendor‐friendly commission rate and may hurt the vendor's value creation incentive and social welfare. Furthermore, we investigate the equilibrium in the market with competing vendors.