Introduction
The globalization of markets has intensified the importance of intellectual property (IP) licensing as a strategic tool for firms to expand their reach and monetize innovations. However, this expansion is often accompanied by challenges such as parallel importation, also known as the “gray market,” where genuine products are resold in unauthorized markets without the IP owner’s consent. This phenomenon disrupts pricing strategies, erodes brand value, and creates conflicts between authorized distributors. Additionally, information asymmetry between licensors and licensees can lead to underreporting of sales, further complicating IP revenue streams.
To mitigate these risks, blockchain technology has emerged as a promising solution. Its inherent features—immutability, transparency, and decentralization—enable secure tracking of IP-licensed products across supply chains. For instance, luxury brands like Louis Vuitton have adopted blockchain to authenticate products and combat counterfeiting. Yet, the interplay between blockchain adoption, IP licensing fees, and parallel importation remains underexplored. This article examines how blockchain traceability influences the decisions of IP licensors and licensees in the presence of gray markets, offering strategic insights for multinational firms.
Theoretical Framework and Model Setup
The analysis is grounded in a Stackelberg game framework, where a dominant manufacturer (Manufacturer 1) in a high-end market licenses its IP to a manufacturer (Manufacturer 2) in a low-end market. Consumers in each market exhibit different willingness-to-pay, with higher valuations in the developed market. The model evaluates two primary scenarios:
- Without Parallel Importation:
• No Blockchain: Manufacturer 2 may underreport sales to reduce royalty payments, while consumers distrust unverified IP products. • With Blockchain: Trust in Manufacturer 2’s products increases, and sales data becomes transparent, but implementation costs are incurred. - With Parallel Importation:
A third-party resells Manufacturer 2’s products back to the high-end market, creating competition for Manufacturer 1. Blockchain’s role here is to deter gray market activities by enhancing traceability and enabling dynamic royalty adjustments.
Key Findings
- Absence of Gray Markets
- Early-Stage IP Licensing: Manufacturer 1 has limited incentive to adopt blockchain due to high costs and low market penetration.
- Mid-Stage IP Licensing: As the low-end market matures, blockchain adoption becomes viable. It boosts consumer trust and mitigates revenue leakage from underreported sales.
- Cost-Benefit Trade-off: Blockchain is adopted only when its cost ((c_B)) is lower than the market’s willingness-to-pay ((a_2)). High costs discourage implementation despite long-term benefits.
- Presence of Gray Markets
- Blockchain as a Deterrent: Blockchain reduces gray market activity by increasing the cost of parallel imports through higher royalty fees. However, it cannot eliminate the gray market entirely.
- Royalty Fee Adjustments: Manufacturer 1 can rebalance royalties to offset blockchain costs, ensuring profitability for both parties. For example, a higher per-unit fee discourages overproduction and resale.
- Threshold Effects: • Low Parallel Import Discount ((\theta < \theta_1)): Blockchain is unnecessary; gray market impact is minimal. • Moderate Discount ((\theta_1 < \theta \theta_2)): IP licensing becomes unviable; Manufacturer 1 exits the arrangement to protect its core market.
- Strategic Implications
- Consumer Trust: Blockchain enhances perceived product authenticity, allowing Manufacturer 2 to command premium prices.
- Dynamic Pricing: Royalty fees must adapt to blockchain costs and gray market pressures. For instance, a 10% increase in blockchain costs may necessitate a 5–7% rise in royalties to maintain margins.
- Market-Specific Strategies: In regions with weak IP enforcement, blockchain’s value outweighs its costs, whereas in regulated markets, traditional contracts may suffice.
Numerical and Case Study Insights
A numerical analysis with parameters (a_1 = 4), (a_2 = 1), and (c_B = 0.1) reveals:
- Profit Erosion: Gray markets reduce profits by 15–20% without blockchain, but only 8–12% with blockchain.
- Royalty Sensitivity: A 0.1-unit increase in (c_B) raises royalties by 0.05 units, highlighting the cost-pass-through mechanism.
The case of Louis Vuitton’s AURA blockchain platform illustrates these findings:
- Development Phase: LV partnered with tech firms to build a blockchain system, reducing verification time from days to minutes.
- Deployment Phase: Gray market incursions dropped by 25% within six months, and e-commerce integrations improved consumer trust.
- Scalability: LV plans global expansion, targeting 100% traceability to eliminate counterfeit and parallel trade.
Conclusion
Blockchain traceability offers a dual advantage in cross-border IP licensing: it strengthens supply chain transparency and mitigates gray market risks. However, its adoption is context-dependent:
- Without parallel imports, manufacturers should adopt blockchain only when market conditions justify the cost.
- With parallel imports, blockchain becomes a strategic imperative, but its effectiveness hinges on adjusting royalty structures and monitoring gray market discount rates.
Future research could explore multi-tier supply chains and the role of smart contracts in automating royalty payments. Policymakers may also consider blockchain-based IP registries to combat global counterfeiting.
DOI: 10.19734/j.issn.1001-3695.2024.09.0326
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