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Formulas for fair, reasonable and non-discriminatory royalty determination

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  • Salant, David J

Abstract

This paper takes an axiomatic approach to determining “Fair, Reasonable, and Non-Discriminatory” (“FRAND”) royalties for intellectual property (“IP”) rights. Drawing on the extensive game theory literature on “surplus sharing/cost sharing” problems, I describe specific formulas for determining license fees that can be derived from basic fairness principles. In particular, I describe the Shapley Value, the Proportional Sharing Rule and the Nucleolus. The Proportional Sharing Rule has the advantage that it is the only rule that is invariant to mergers and splitting of the IP owners. I also explain why, at times, there may be no acceptable to solution. Further, I contrast these rules with the Efficient Component Pricing Rule (“ECPR”) suggested by Baumol and Swanson. Unlike, the ECPR, the rules identified in this paper can uniquely determine license fees when there is more than one owner of essential IP, and also incorporate various notions of fairness and equity.

Suggested Citation

  • Salant, David J, 2007. "Formulas for fair, reasonable and non-discriminatory royalty determination," MPRA Paper 8569, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:8569
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    File URL: https://mpra.ub.uni-muenchen.de/8569/1/MPRA_paper_8569.pdf
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    References listed on IDEAS

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    1. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
    2. Martin J. Osborne & Ariel Rubinstein, 2005. "Bargaining and Markets," Levine's Bibliography 666156000000000515, UCLA Department of Economics.
    3. Tijs, S.H. & Driessen, T.S.H., 1986. "Game theory and cost allocation problems," Other publications TiSEM 376c24c5-c95d-4d29-96b6-4, Tilburg University, School of Economics and Management.
    4. Stole, Lars A & Zwiebel, Jeffrey, 1996. "Organizational Design and Technology Choice under Intrafirm Bargaining," American Economic Review, American Economic Association, vol. 86(1), pages 195-222, March.
    5. Lars A. Stole & Jeffrey Zwiebel, 1996. "Intra-firm Bargaining under Non-binding Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 63(3), pages 375-410.
    6. SCHMEIDLER, David, 1969. "The nucleolus of a characteristic function game," LIDAM Reprints CORE 44, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    7. Serrano, Roberto, 1995. "Strategic bargaining, surplus sharing problems and the nucleolus," Journal of Mathematical Economics, Elsevier, vol. 24(4), pages 319-329.
    8. S. H. Tijs & T. S. H. Driessen, 1986. "Game Theory and Cost Allocation Problems," Management Science, INFORMS, vol. 32(8), pages 1015-1028, August.
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    Cited by:

    1. Pohlmann, Tim & Opitz, Marieke, 2010. "The Patent Troll Business: An Efficient model to enforce IPR?," MPRA Paper 27342, University Library of Munich, Germany, revised 01 Dec 2010.

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    More about this item

    Keywords

    FRAND; Royalty Rates; Intellectual Property;
    All these keywords.

    JEL classification:

    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures

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