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Auctioning Process Innovations when Losers’ Bids Determine Royalty Rates

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  • Fan, Cuihong
  • Jun, Byoung Heon
  • Wolfstetter, Elmar G.

Abstract

We consider a licensing mechanism for process innovations that combines a license auction with royalty contracts to those who lose the auction. Firms’ bids are dual signals of their cost reductions: the winning bid signals the own cost reduction to rival oligopolists, whereas the losing bid influences the beliefs of the innovator who uses that information to set the royalty rate. We derive conditions for existence of a separating equilibrium, explain why a sufficiently high reserve price is essential for such an equilibrium, and show that the innovator generally benefits from the proposed mechanism.

Suggested Citation

  • Fan, Cuihong & Jun, Byoung Heon & Wolfstetter, Elmar G., 2009. "Auctioning Process Innovations when Losers’ Bids Determine Royalty Rates," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 291, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    • Handle: RePEc:trf:wpaper:291
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    File URL: https://epub.ub.uni-muenchen.de/13263/1/291.pdf
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    References listed on IDEAS

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    Cited by:

    1. David Ettinger, 2010. "Bidding among Friends and Enemies with Symmetric Information," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 166(2), pages 365-385, June.

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    More about this item

    Keywords

    Patents; licensing; auctions; royalty; innovation; R&D; mechanism design;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing

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