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Bargaining with Externalities: Licensing of an Innovation

  • Sempere-Monerris, José J.

    (University of Valencia, Department of Economic Analysis)

  • Vannetelbosch, Vincent J.

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES); UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE))

The objective of this paper is to analyze the relationship between bargaining organizational forms and the licensing of cost-reducing innovations, in order to assess the patent holders optimal policy as well as their welfare properties. Trading mechanisms based on bargaining models with voluntary matching become more relevant when the market for an innovation is small. Our main findings are that when we exclude the use of a reservation price different to the continuation value of the game, it is no longer true that the auction mechanism yields always higher profits to the patentee than a fixed fee. Furthermore, the patent holder prefers the take-it-or-leave-it to the fixed fee, the alternating bids or the simultaneous bids mechanism. Also, bargaining mechanisms allow the patentee to overcome the credibility problem associated with the reservation price. Regarding the social viewpoint (a social agency maximizing the domestic welfare under the assumption that the patentee is a foreign laboratory), it is the best the licensing through the simultaneous bids mechanism. Moreover, licensing through the take-it-or-leave-it is better than licensing through auction mechanisms.

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Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 1997007.

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Length: 26
Date of creation: 01 May 1997
Date of revision:
Handle: RePEc:ctl:louvir:1997007
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  1. Hendon, Ebbs & Tranaes, Torben, 1991. "Sequential bargaining in a market with one seller and two different buyers," Games and Economic Behavior, Elsevier, vol. 3(4), pages 453-466, November.
  2. 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.
  3. Ebbe Hendon & Birgitte Sloth & Torben Tranæs, 1994. "Decentralized trade with bargaining and voluntary matching," Review of Economic Design, Springer, vol. 1(1), pages 55-77, December.
  4. Martin J. Osborne & Ariel Rubinstein, 2005. "Bargaining and Markets," Levine's Bibliography 666156000000000515, UCLA Department of Economics.
  5. Michael L. Katz & Carl Shapiro, 1986. "How to License Intangible Property," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 567-589.
  6. Kamien, Morton I., 1992. "Patent licensing," Handbook of Game Theory with Economic Applications, in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 1, chapter 11, pages 331-354 Elsevier.
  7. Philippe Jehiel & Benny Moldovanu, 1995. "Cyclical Delay in Bargaining with Externalities," Review of Economic Studies, Oxford University Press, vol. 62(4), pages 619-637.
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