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Inefficiencies in the sale of ideas: theory and empirics

Author

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  • Marie-Laure Allain

    (Department of Economics, Ecole Polytechnique - X - École polytechnique - CNRS - Centre National de la Recherche Scientifique)

  • Emeric Henry

    (Sciences Po - Department of Economics)

  • Margaret Kyle

    (TSE - Toulouse School of Economics - Toulouse School of Economics)

Abstract

The sale of ideas (e.g. through licensing) facilitates vertical specialization and the division of labor between research and development. This specialization can improve the overall efficiency of the innovative process. However, these gains depend on the timing of the sale: the buyer of an idea should assume development at the stage at which he has an efficiency advantage. We show that in an environment with asymmetric information about the value of the idea and where this asymmetry decreases as the product is developed, the seller of the idea may delay the sale to the more efficient firm, thus incurring higher development costs. We obtain a condition for the equilibrium timing of the sale and examine how factors such as the intensity of competition between potential buyers influence it. Empirical analysis of licensing contracts signed between firms in the pharmaceutical industry supports our theoretical predictions.

Suggested Citation

  • Marie-Laure Allain & Emeric Henry & Margaret Kyle, 2011. "Inefficiencies in the sale of ideas: theory and empirics," Working Papers hal-00639128, HAL.
  • Handle: RePEc:hal:wpaper:hal-00639128
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00639128
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    References listed on IDEAS

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    1. Motta,Massimo, 2004. "Competition Policy," Cambridge Books, Cambridge University Press, number 9780521016919, March.
    2. Vishwasrao, Sharmila, 2007. "Royalties vs. fees: How do firms pay for foreign technology?," International Journal of Industrial Organization, Elsevier, vol. 25(4), pages 741-759, August.
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    4. James J. Anton & Dennis A. Yao, 2002. "The Sale of Ideas: Strategic Disclosure, Property Rights, and Contracting," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 513-531.
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    12. Anand, Bharat N & Khanna, Tarun, 2000. "The Structure of Licensing Contracts," Journal of Industrial Economics, Wiley Blackwell, vol. 48(1), pages 103-135, March.
    13. Joshua S. Gans & David H. Hsu & Scott Stern, 2008. "The Impact of Uncertain Intellectual Property Rights on the Market for Ideas: Evidence from Patent Grant Delays," Management Science, INFORMS, vol. 54(5), pages 982-997, May.
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    Cited by:

    1. Joshua S. Gans, 2014. "Negotiating for the Market," NBER Working Papers 20559, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Biotechnology; Innovation; Licensing; Market structure; Bargaining; Pharmaceuticals; Biotechnology.;

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