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The economic sense of royalty rates

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Author Info
Elli Malki (Financial-Tip)

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Abstract

Academic institutions, involved in technology transfer to industry, are always concerned about the "fairness" of the royalty rate payable to them. The common method used by practitioners is the "Industry-Standard Approach" which is based mainly on past experience. However such approach is very simplistic and fails to take into account importnat factors that effect royalty rate calculations. By using a simple financial model, the article demonstrates that expected sales volume of the end product is a key determinant of royalty rates. Higher expected sales volume enables the licensee to pay higher royalties to the licensor, while keeping its required rate of return unchanged. This point is totally overlooked by the "Industry-Standard Approach" and moreover it contradicts a commonly used practice to reduce the royalty rates with the increase in sales.

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Publisher Info
Paper provided by EconWPA in its series Finance with number 9709003.

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Date of creation: 25 Sep 1997
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Handle: RePEc:wpa:wuwpfi:9709003

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Web page: http://129.3.20.41

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Related research
Keywords: Royalties Technology Transfer R&D Licensing;

Find related papers by JEL classification:
G30 - Financial Economics - - Corporate Finance and Governance - - - General
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology
M21 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics - - - Business Economics
O32 - Economic Development, Technological Change, and Growth - - Technological Change - - - Management of Technological Innovation and R&D

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Did you know? IDEAS was launched in September 1997.

This page was last updated on 2009-12-13.

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