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Licensing a standard: fixed fee versus royalty

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  • PARLANE, Sarah
  • MENIERE, Yann

Abstract

This paper explores how an inventor should license an innovation that opens new markets for the licensees. Using a model incorporating product differentiation and network externalities we show that fixed fee licenses are optimal either when there is little competition downstream or when it is desirable to restrict entry. By opposition, royalty based licensesallo wsfor more downstream firms (thanks to higher prices) and lead to a revenue which is less sensitive to more product homogeneity. They are optimal when downstream entry is desirable, which occurs either because there are positive network externalities, or for some intermediate values of product differentiation.

Suggested Citation

  • PARLANE, Sarah & MENIERE, Yann, 2006. "Licensing a standard: fixed fee versus royalty," LIDAM Discussion Papers CORE 2006116, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2006116
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    File URL: https://sites.uclouvain.be/core/publications/coredp/coredp2006.html
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    References listed on IDEAS

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    1. Francisco Caballero-Sanz & Rafael Moner-Colonques & José J. Sempere-Monerris, 2002. "Optimal Licensing in a Spatial Model," Annals of Economics and Statistics, GENES, issue 66, pages 257-279.
    2. Benjamin Chiao & Josh Lerner & Jean Tirole, 2007. "The rules of standard-setting organizations: an empirical analysis," RAND Journal of Economics, RAND Corporation, vol. 38(4), pages 905-930, December.
    3. Sen, Debapriya, 2005. "Fee versus royalty reconsidered," Games and Economic Behavior, Elsevier, vol. 53(1), pages 141-147, October.
    4. repec:adr:anecst:y:2002:i:66:p:11 is not listed on IDEAS
    5. Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, edition 1, volume 1, number 026272040x, December.
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