Two firms who are rivals in some product markets have an opportunity to exploit the market for a new product (z), however production of this good requires technologies that are subject to intellectual property (IP) held by both firms. Unless both firms agree to cross license their IP, the product cannot be produced. If IP is cross licensed, each firm will gain an equal market share, generating revenues of R for each. If one firm licenses its IP, then only the other firm can produce z. Firm 1's IP has other product applications and if licensed would bring in additional revenues (r) from sources not related to product z. Firm 2's IP only relates to product z and will not generate any revenues if z is not produced. Assume that FRAND (fair, reasonable, and non-discriminatory) licensing rates, set by the standard- setting organization for their industry, are the same for each firm if they decide to license their IP.

Use the generic bimatrix game below to analyze this situation. Explain your payoff orderings. What equilibria exist in this game? What do you predict will happen?

Firm 2 License Don't License License a , a C , Y Firm 1 Don't license b , B d, s