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Welfare-optimal patent royalties when imitation is costly

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  • Leiva Bertran, Fernando J.
  • Turner, John L.

Abstract

We identify welfare-optimal patent royalties in a model of costly imitation, entry and imperfect competition. When the social planner may impose a compulsory license, optimal royalties either blockade imitation, facilitating unregulated monopoly, or yield an aggregate-zero-profit efficient duopoly. When duopoly is optimal, the optimal per-unit royalty pins the equilibrium price at the aggregate average cost and the optimal fixed royalty shifts surplus so the patentee and imitator break even. Efficient duopoly yields higher welfare than monopoly for sufficiently low invention cost, and may also yield higher welfare than a prize system. Interestingly, royalty payments may be negative. Because of this, efficient duopoly may not be feasible if the planner must instead direct the courts to use such royalties.

Suggested Citation

  • Leiva Bertran, Fernando J. & Turner, John L., 2017. "Welfare-optimal patent royalties when imitation is costly," Journal of Economic Behavior & Organization, Elsevier, vol. 137(C), pages 457-475.
  • Handle: RePEc:eee:jeborg:v:137:y:2017:i:c:p:457-475
    DOI: 10.1016/j.jebo.2017.03.014
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    References listed on IDEAS

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    More about this item

    Keywords

    Damages; Entry; Invention; Patents; Prize system; Royalties;

    JEL classification:

    • K2 - Law and Economics - - Regulation and Business Law
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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