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Abstract

The sale of ideas (e.g. through licensing) facilitates vertical specialization and the division of labor between research and development. This specialization can improve the overall efficiency of the innovative process. However, these gains depend on the timing of the sale: the buyer of an idea should assume development at the stage at which he has an efficiency advantage. We show that in an environment with asymmetric information about the value of the idea and where this asymmetry decreases as the product is developed, the seller of the idea may delay the sale to the more efficient firm, thus incurring higher development costs. We obtain a condition for the equilibrium timing of the sale and examine how factors such as the intensity of competition between potential buyers influence it. Empirical analysis of licensing contracts signed between firms in the pharmaceutical industry supports our theoretical predictions.

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Bibliographic Info

Paper provided by HAL in its series Working Papers with number hal-00639128.

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Date of creation: 08 Nov 2011
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Handle: RePEc:hal:wpaper:hal-00639128

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Related research

Keywords: Innovation; Licensing; Market structure; Bargaining; Pharmaceuticals; Biotechnology.;

This paper has been announced in the following NEP Reports:

• NEP-ALL-2011-12-05 (All new papers)
• NEP-BEC-2011-12-05 (Business Economics)
• NEP-COM-2011-12-05 (Industrial Competition)
• NEP-CTA-2011-12-05 (Contract Theory & Applications)
• NEP-GTH-2011-12-05 (Game Theory)
• NEP-INO-2011-12-05 (Innovation)
• NEP-IPR-2011-12-05 (Intellectual Property Rights)
• NEP-MIC-2011-12-05 (Microeconomics)
• NEP-TID-2011-12-05 (Technology & Industrial Dynamics)

References

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1. Vishwasrao, Sharmila, 2007. "Royalties vs. fees: How do firms pay for foreign technology?," International Journal of Industrial Organization, Elsevier, vol. 25(4), pages 741-759, August.
   
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   • Pedro Mendi, 2003. "The Structure of Payments in Technology Transfer Contracts: Evidence from Spain," Faculty Working Papers 05/03, School of Economics and Business Administration, University of Navarra.
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6. Allain, Marie-Laure & Henry, Emeric & Kyle, Margaret K, 2011. "Inefficiencies in technology transfer: theory and empirics," CEPR Discussion Papers 8206, C.E.P.R. Discussion Papers.
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8. Sean Nicholson, 2005. "Biotech-Pharmaceutical Alliances as a Signal of Asset and Firm Quality," The Journal of Business, University of Chicago Press, vol. 78(4), pages 1433-1464, July.
   
   • Sean Nicholson & Patricia M. Danzon & Jeffrey McCullough, 2002. "Biotech-Pharmaceutical Alliances as a Signal of Asset and Firm Quality," NBER Working Papers 9007, National Bureau of Economic Research, Inc.
9. Joshua S. Gans & David H. Hsu & Scott Stern, 2007. "The Impact of Uncertain Intellectual Property Rights on the Market For Ideas: Evidence From Patent Grant Delays," NBER Working Papers 13234, National Bureau of Economic Research, Inc.
   
   • Joshua S. Gans & David H. Hsu & Scott Stern, 2008. "The Impact of Uncertain Intellectual Property Rights on the Market for Ideas: Evidence from Patent Grant Delays," Management Science, INFORMS, vol. 54(5), pages 982-997, May.
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    • Choi, Jay Pil, 2001. "Technology transfer with moral hazard," International Journal of Industrial Organization, Elsevier, vol. 19(1-2), pages 249-266, January.
    • Choi, Jay Pil, 1996. "Technology Transfer with Moral Hazard," Economics Series 22, Institute for Advanced Studies.
11. Beggs, A. W., 1992. "The licensing of patents under asymmetric information," International Journal of Industrial Organization, Elsevier, vol. 10(2), pages 171-191, June.
12. Anton, James J & Yao, Dennis A, 2002. "The Sale of Ideas: Strategic Disclosure, Property Rights, and Contracting," Review of Economic Studies, Wiley Blackwell, vol. 69(3), pages 513-31, July.
13. Josh Lerner & Ulrike Malmendier, 2005. "Contractibility and the Design of Research Agreements," NBER Working Papers 11292, National Bureau of Economic Research, Inc.
    
    • Josh Lerner & Ulrike Malmendier, 2010. "Contractibility and the Design of Research Agreements," American Economic Review, American Economic Association, vol. 100(1), pages 214-46, March.
14. Howard Smith & John Thanassoulis, 2009. "Upstream Competition and Downstream Buyer Power," Economics Series Working Papers 420, University of Oxford, Department of Economics.
    
    • Smith, Howard & Thanassoulis, John, 2006. "Upstream Competition and Downstream Buyer Power," CEPR Discussion Papers 5803, C.E.P.R. Discussion Papers.
15. Ashish Arora & Andrea Fosfuri & Alfonso Gambardella, 2004. "Markets for Technology: The Economics of Innovation and Corporate Strategy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262511819.
16. McAfee, R Preston & Schwartz, Marius, 1994. "Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity," American Economic Review, American Economic Association, vol. 84(1), pages 210-30, March.

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