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Designing Auctions in R&D: Optimal Licensing of an Innovation

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  • Brocas Isabelle

    ()
    (University of Southern California)

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    Abstract

    We study an R&D game in which a research unit undertakes a (non-observable) research effort and, if an innovation is obtained, auctions licenses to a pool of producers. Each producer has a private valuation for the license and suffers a negative externality when a competitor becomes a licensee. We compare the optimal rule for the allocation of licenses and the level of research effort implemented by the innovator in two scenarios: free licensing by the innovator vs. optimal regulation. As long as the cost of public intervention is sufficiently low, free licensing induces two different types of inefficiencies: an excessively high price for licenses and a suboptimal dissemination of knowledge, and an excessively low research effort. This indicates that public intervention should combine the following measures: (i) an antitrust agency which limits the royalties that innovators can ask for a license, and (ii) a direct subsidy to research activity.

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    File URL: http://www.degruyter.com/view/j/bejeap.2006.6.1/bejeap.2006.6.1.1533/bejeap.2006.6.1.1533.xml?format=INT
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    Bibliographic Info

    Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

    Volume (Year): 6 (2006)
    Issue (Month): 1 (August)
    Pages: 1-41

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    Handle: RePEc:bpj:bejeap:v:topics.6:y:2006:i:1:n:11

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