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Per unit vs. ad valorem royalties under asymmetric information

Author

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  • Heywood, John S.
  • Li, Jianpei
  • Ye, Guangliang

Abstract

We study an inside patent holder's optimal licensing policy when it has imperfect information about the value of the patent to its rival. The patent holder can choose any two-part licensing fee with either per unit or ad valorem royalties. We demonstrate that the equilibrium will be either a fully separating contract with different per unit royalty rates, or a contract with a single ad valorem royalty that excludes a high cost rival. Fixed fees will not be used. The presence of asymmetric information uniquely drives the per unit royalties that otherwise would not be adopted. Per unit royalties always generate higher social welfare than ad valorem royalties.

Suggested Citation

  • Heywood, John S. & Li, Jianpei & Ye, Guangliang, 2014. "Per unit vs. ad valorem royalties under asymmetric information," International Journal of Industrial Organization, Elsevier, vol. 37(C), pages 38-46.
  • Handle: RePEc:eee:indorg:v:37:y:2014:i:c:p:38-46
    DOI: 10.1016/j.ijindorg.2014.07.005
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Colombo, Stefano & Filippini, Luigi, 2014. "Licensing and innovation: A comment," Economics Letters, Elsevier, vol. 125(3), pages 353-356.
    2. John Heywood & Zheng Wang, 2015. "How to license a transport innovation," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 55(2), pages 485-500, December.
    3. Gelves, Juan Alejandro & Heywood, John S., 2016. "How does a mixed ownership firm license a patent?," Economic Modelling, Elsevier, vol. 59(C), pages 278-284.
    4. Cuihong Fan & Byoung Heon Jun & Elmar G. Wolfstetter, 2017. "Per Unit vs. Ad Valorem Royalty Licensing," Discussion Paper Series 1706, Institute of Economic Research, Korea University.
    5. Cuihong Fan & Byoung Heon Jun & Elmar G. Wolfstetter, 2017. "Optimal Licensing of Technology in the Face of (Asymmetric) Competition," Discussion Paper Series 1705, Institute of Economic Research, Korea University.
    6. Stefano Colombo & Luigi Filippini, 2016. "Revenue royalties," Journal of Economics, Springer, vol. 118(1), pages 47-76, May.
    7. Fan, Cuihong & Jun, Byoung Heon & Wolfstetter, Elmar G., 2015. "Licensing Innovations: The Case of the Inside Patent Holder," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 510, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

    More about this item

    Keywords

    Patent licensing; Insider; Asymmetric information; Per unit royalty; Ad valorem royalty;

    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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