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Optimal Licensing Strategy: Royalty or Fixed Fee?

Author

Listed:
  • Andrea Fosfuri

    (Department of Business Administration, Universidad Carlos III de Madrid, Spain and CEPR, London, U.K.)

  • Esther Roca

    (ICADE, Spain)

Abstract

Licensing a cost-reducing innovation through a royalty has been shown to be superior to licensing by means of a fixed fee for an incumbent licensor. This note shows that this result relies crucially on the assumption that the incumbent licensor can sell its cost-reducing inno-vation to all industry players. If, for any reason, only some competitors could be reached through a licensing contract, then a fixed fee might be optimally chosen.

Suggested Citation

  • Andrea Fosfuri & Esther Roca, 2004. "Optimal Licensing Strategy: Royalty or Fixed Fee?," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 3(1), pages 13-19, April.
    • Handle: RePEc:ijb:journl:v:3:y:2004:i:1:p:13-19
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    References listed on IDEAS

    as
    1. Arora, Ashish & Fosfuri, Andrea, 2003. "Licensing the market for technology," Journal of Economic Behavior & Organization, Elsevier, vol. 52(2), pages 277-295, October.
    2. Fosfuri, Andrea, 2004. "The licensing dilemma: understanding the determinants of the rate of licensing," DEE - Working Papers. Business Economics. WB wb041507, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    3. Wang, X. Henry, 1998. "Fee versus royalty licensing in a Cournot duopoly model," Economics Letters, Elsevier, vol. 60(1), pages 55-62, July.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Stefano Colombo & Luigi Filippini, 2013. "Fee versus royalty licensing in a Cournot duopoly model with a commitment of no production," Economics Bulletin, AccessEcon, vol. 33(3), pages 2122-2128.
    2. Yan, Qingyou & Yang, Le, 2018. "Optimal licensing schemes for a mixed ownership firm when facing uncertain R&D outcomes and technology spillover," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 550-572.
    3. Masahiko Hattori & Yasuhito Tanaka, 2018. "Negative Royalty in Duopoly and Definition of License Fee: General Demand and Cost Functions," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 17(2), pages 163-178, September.
    4. Mukherjee, Arijit, 2010. "Licensing a new product: Fee vs. royalty licensing with unionized labor market," Labour Economics, Elsevier, vol. 17(4), pages 735-742, August.
    5. Siddhartha Bandyopadhyay & Arijit Mukherjee, 2014. "R&D Cooperation with Entry," Manchester School, University of Manchester, vol. 82(1), pages 52-70, January.
    6. Arijit Mukherjee, 2010. "Technology licensing under convex costs," Discussion Papers 10/05, University of Nottingham, School of Economics.
    7. Dawson Peter, 2013. "Royalty Rate Determination," Journal of Business Valuation and Economic Loss Analysis, De Gruyter, vol. 8(1), pages 1-29, October.
    8. Sinha, Uday Bhanu, 2016. "Optimal value of a patent in an asymmetric Cournot duopoly market," Economic Modelling, Elsevier, vol. 57(C), pages 93-105.
    9. Richard Watt, 2014. "Licensing of copyright works in a bargaining model," Chapters, in: Richard Watt (ed.), Handbook on the Economics of Copyright, chapter 6, pages 107-117, Edward Elgar Publishing.
    10. Chen, Yi-Wen & Yang, Ya-Po & Wang, Leonard F.S. & Wu, Shih-Jye, 2014. "Technology licensing in mixed oligopoly," International Review of Economics & Finance, Elsevier, vol. 31(C), pages 193-204.
    11. Dawson Peter, 2013. "Royalty Rate Determination," Journal of Business Valuation and Economic Loss Analysis, De Gruyter, vol. 8(1), pages 1-29, October.
    12. Sougata Poddar & Uday Bhanu Sinha, 2010. "Patent Licensing from a High‐Cost Firm to a Low‐Cost Firm," The Economic Record, The Economic Society of Australia, vol. 86(274), pages 384-395, September.
    13. repec:ebl:ecbull:v:30:y:2010:i:1:p:20-31 is not listed on IDEAS
    14. Arijit Mukherjee & Yingyi Tsai, 2013. "Technology licensing under optimal tax policy," Journal of Economics, Springer, vol. 108(3), pages 231-247, April.
    15. Chin-Sheng Chen, 2017. "Endogenous Market Structure and Technology Licensing," The Japanese Economic Review, Springer, vol. 68(1), pages 115-130, March.
    16. Ming-Chung Chang, 2010. "Insider patent holder licensing in an oligopoly market with different cost structures: Fixed-fee, royalty, and auction," Economics Bulletin, AccessEcon, vol. 30(1), pages 20-31.
    17. Wang, Kuang-Cheng Andy & Liang, Wen-Jung & Chou, Pin-Shu, 2013. "Patent licensing under cost asymmetry among firms," Economic Modelling, Elsevier, vol. 31(C), pages 297-307.
    18. Cho, Sumi & Kim, Doori & Lee, Sang-Ho, 2022. "Free licensing strategy and ex-post privatization policy with passive ownership," Economic Modelling, Elsevier, vol. 106(C).
    19. Bagchi, Aniruddha & Mukherjee, Arijit, 2014. "Technology licensing in a differentiated oligopoly," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 455-465.
    20. Chin-Sheng Chen, 2017. "Endogenous Market Structure and Technology Licensing," The Japanese Economic Review, Japanese Economic Association, vol. 68(1), pages 115-130, March.

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    More about this item

    Keywords

    licensing contract; Cournot competition; strategic effects;
    All these keywords.

    JEL classification:

    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing

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