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On the Choice of Royalty Rule to Cover Fixed Costs in Input Joint Ventures

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  • Kenneth Fjell
  • Øystein Foros
  • Hans Jarle Kind

Abstract

In a model where two competing downstream firms establish an input joint venture (JV), we analyze how different royalty rules for covering fixed costs affect channel profits. Under running royalties, the downstream firms' perceived marginal costs are above the true marginal costs since fixed costs are incorporated. We find that tougher competition between the JV partners may actually increase channel profit under such a scheme. However, lump-sum royalties are preferable if the competitive pressure is weak.

Suggested Citation

  • Kenneth Fjell & Øystein Foros & Hans Jarle Kind, 2015. "On the Choice of Royalty Rule to Cover Fixed Costs in Input Joint Ventures," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 22(3), pages 393-406, November.
  • Handle: RePEc:taf:ijecbs:v:22:y:2015:i:3:p:393-406
    DOI: 10.1080/13571516.2014.965898
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    References listed on IDEAS

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    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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