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Licensing process innovations when losersʼ messages 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 awards a limited number of unrestricted licenses to those firms that report the highest cost reductions, combined with royalty licenses to others. Firmsʼ messages are dual signals of their cost reductions: the message of those who win an unrestricted license signals their cost reduction to rival firms, while losersʼ messages influence the royalty rate set by the innovator. We explain why a sufficiently high threshold level for awarding the unrestricted license is essential to induce truth-telling, show that the innovator generally benefits from the proposed mechanism, and derive conditions for implementability by a modified second-price auction.

Suggested Citation

  • Fan, Cuihong & Jun, Byoung Heon & Wolfstetter, Elmar G., 2013. "Licensing process innovations when losersʼ messages determine royalty rates," Games and Economic Behavior, Elsevier, vol. 82(C), pages 388-402.
  • Handle: RePEc:eee:gamebe:v:82:y:2013:i:c:p:388-402
    DOI: 10.1016/j.geb.2013.08.003
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    Cited by:

    1. Cuihong Fan & Byoung Jun & Elmar Wolfstetter, 2014. "Licensing a common value innovation when signaling strength may backfire," International Journal of Game Theory, Springer;Game Theory Society, vol. 43(1), pages 215-244, February.
    2. Todd R. Kaplan & Shmuel Zamir, 2014. "Advances in Auctions," Discussion Papers 1405, University of Exeter, Department of Economics.
    3. A. Shastitko & A. Kurdin., 2016. "Incentives for process innovations under discrete structural alternatives of competition policy," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 4.
    4. Stefano Colombo & Luigi Filippini, 2015. "Patent Licensing with Bertrand Competitors," Manchester School, University of Manchester, vol. 83(1), pages 1-16, January.
    5. Fan, Cuihong & Jun, Byoung Heon & Wolfstetter, Elmar G., 2016. "Optimal bid disclosure in patent license auctions under alternative modes of competition," International Journal of Industrial Organization, Elsevier, vol. 47(C), pages 1-32.
    6. Ding, Wei & Fan, Cuihong & Wolfstetter, Elmar G., 2013. "Horizontal mergers with synergies: Cash vs. profit-share auctions," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 382-391.
    7. Fan, Cuihong & Jun, Byoung Heon & Wolfstetter, Elmar G., 2018. "Optimal licensing of technology in the face of (asymmetric) competition," International Journal of Industrial Organization, Elsevier, vol. 60(C), pages 32-53.
    8. Cuihong Fan & Byoung Heon Jun & Elmar G. Wolfstetter, 2018. "Optimal licensing under incomplete information: the case of the inside patent holder," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 66(4), pages 979-1005, December.
    9. Kaplan, Todd R. & Zamir, Shmuel, 2015. "Advances in Auctions," Handbook of Game Theory with Economic Applications,, Elsevier.
    10. Fan, Cuihong & Jun, Byoung Heon & Wolfstetter, Elmar G., 2018. "Per unit vs. ad valorem royalty licensing," Economics Letters, Elsevier, vol. 170(C), pages 71-75.
    11. Fan, Cuihong & Jun, Byoung Heon & Wolfstetter, Elmar G., 2014. "Optimal bid disclosure in license auctions with downstream interaction," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 467, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

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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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