REPUTATIONAL SPILLOVERS, INNOVATION, LICENSING, AND ENTRY

Adoption of a new product by a multiproduct firm may affect all its sales by altering its reputation as an innovator. If adopting a success has a 'halo effect' that enhances the adopter's reputation, then an inventor's licensing profit exceeds monopoly profit from the new product. If adopting a failure has a 'black-eye effect' that damages the adopter's reputation, then an inventor's licensing profit is maximized by a fixed fee, not an auction. When both effects are present, an inventor licenses new products that are likely to succeed, but enters with those that are likely to fail.