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Per-Unit Royalty vs Fixed Fee: The Case of Weak Patents

  • Rabah Amir


    (University of Arizona - University of Arizona)

  • David Encaoua


    (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics)

  • Yassine Lefouili


    (GREMAQ - Groupe de recherche en économie mathématique et quantitative - CNRS - Institut national de la recherche agronomique (INRA) - UT1 - Université Toulouse 1 Capitole - EHESS - École des hautes études en sciences sociales)

This paper explores a licensor's choice between charging a per-unit royalty or a fixed fee when her innovation is covered by a weak patent, i.e. a patent that is likely to be invali- dated by a court if challenged. Using a general model where the nature of competition is not speci ed, we show that the patent holder prefers to use a per-unit royalty scheme if the strategic e¤ect of an increase in a potential licensee's unit cost on the aggregate equi- librium pro t is positive. To show the mildness of the latter condition, we establish that it holds in a Cournot (resp. Bertrand) oligopoly with homegenous (resp. heterogenous) products under very general assumptions on the demands faced by rms. As a byproduct of our analysis, we contribute to the oligopoly literature by o¤ering some new insights of independent interest regarding the e¤ects of cost variations on Cournot and Bertrand equilibria.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00595493.

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Date of creation: Feb 2011
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Handle: RePEc:hal:cesptp:halshs-00595493
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  1. Macho-Stadler, Ines & Martinez-Giralt, Xavier & David Perez-Castrillo, J., 1996. "The role of information in licensing contract design," Research Policy, Elsevier, vol. 25(1), pages 43-57, January.
  2. Inés MACHO-STADLER & David PEREZ-CASTRILLO, 1991. "Contrats de licences et asymétrie d'information," Annales d'Economie et de Statistique, ENSAE, issue 24, pages 189-208.
  3. Fevrier, Philippe & Linnemer, Laurent, 2004. "Idiosyncratic shocks in an asymmetric Cournot oligopoly," International Journal of Industrial Organization, Elsevier, vol. 22(6), pages 835-848, June.
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