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Fees Versus Royalties and the Private Value of a Patent

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  • Morton I. Kamien
  • Yair Tauman

Abstract

We compare how much profit an owner of a patented cost-reducing invention can realize by licensing it to an oligopolistic industry producing a homogeneous product, by means of a fixed fee or a per unit royalty. Our analysis is conducted in terms of a noncooperative game involving n + 1 players: the inventor and the n firms. In this game the inventor acts as a Stackelberg leader, and it has a unique subgame perfect equilibrium in pure strategies. It is shown that licensing by means of a fixed fee is superior to licensing by means of a royalty for both the inventor and consumers. Only a "drastic" innovation is licensed to a single producer.

Suggested Citation

  • Morton I. Kamien & Yair Tauman, 1986. "Fees Versus Royalties and the Private Value of a Patent," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 471-491.
  • Handle: RePEc:oup:qjecon:v:101:y:1986:i:3:p:471-491.
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    File URL: http://hdl.handle.net/10.2307/1885693
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    1. Morton I. Kamien & Yair Tauman, 1983. "The Private Value of a Patent: A Game Theoretic Analysis," Discussion Papers 576, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. Kamien,Morton I. & Schwartz,Nancy L., 1982. "Market Structure and Innovation," Cambridge Books, Cambridge University Press, number 9780521293853.
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