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Optimal Licensing of Technology in the Face of (Asymmetric) Competition


  • Cuihong Fan

    () (Shanghai University of Finance and Economics)

  • Byoung Heon Jun

    () (Department of Economics, Korea University, Seoul, Republic of Korea)

  • Elmar G. Wolfstetter

    () (Department of Economics, Korea University, Seoul, Republic of Korea)


We reconsider the optimal licensing of technology by an incumbent firm in the presence of multiple potential licensees. In a first step we show that competition among potential licensees has a drastic effect on optimal two-part tariff contracts. We then introduce more general mechanisms and design a dynamic mechanism that extracts the maximum industry profit while reducing the potential licensees' payoff to the minimum level that they can assure themselves. That mechanism can be viewed as a generalized "chutzpah" mechanism, generalized because it employs royalties to maximize the industry profit. It awards licenses to all firms and prescribes maximum permitted royalty rates plus positive fixed fees.

Suggested Citation

  • Cuihong Fan & Byoung Heon Jun & Elmar G. Wolfstetter, 2017. "Optimal Licensing of Technology in the Face of (Asymmetric) Competition," Discussion Paper Series 1705, Institute of Economic Research, Korea University.
  • Handle: RePEc:iek:wpaper:1705

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    References listed on IDEAS

    1. Heywood, John S. & Li, Jianpei & Ye, Guangliang, 2014. "Per unit vs. ad valorem royalties under asymmetric information," International Journal of Industrial Organization, Elsevier, vol. 37(C), pages 38-46.
    2. Sen, Debapriya & Tauman, Yair, 2007. "General licensing schemes for a cost-reducing innovation," Games and Economic Behavior, Elsevier, vol. 59(1), pages 163-186, April.
    3. Sougata Poddar & Uday Bhanu Sinha, 2010. "Patent Licensing from a High-Cost Firm to a Low-Cost Firm," The Economic Record, The Economic Society of Australia, vol. 86(274), pages 384-395, September.
    4. Stefano Colombo & Luigi Filippini, 2015. "Patent Licensing with Bertrand Competitors," Manchester School, University of Manchester, vol. 83(1), pages 1-16, January.
    5. Michael L. Katz & Carl Shapiro, 1985. "On the Licensing of Innovations," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 504-520, Winter.
    6. Wang, X. Henry, 1998. "Fee versus royalty licensing in a Cournot duopoly model," Economics Letters, Elsevier, vol. 60(1), pages 55-62, July.
    7. Kamien, Morton I & Tauman, Yair, 2002. "Patent Licensing: The Inside Story," Manchester School, University of Manchester, vol. 70(1), pages 7-15, January.
    8. Giebe, Thomas & Wolfstetter, Elmar, 2008. "License auctions with royalty contracts for (winners and) losers," Games and Economic Behavior, Elsevier, vol. 63(1), pages 91-106, May.
    9. Kamien, Morton I. & Oren, Shmuel S. & Tauman, Yair, 1992. "Optimal licensing of cost-reducing innovation," Journal of Mathematical Economics, Elsevier, vol. 21(5), pages 483-508.
    10. Niu, Shuai, 2013. "The equivalence of profit-sharing licensing and per-unit royalty licensing," Economic Modelling, Elsevier, vol. 32(C), pages 10-14.
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    More about this item


    Patent licensing; innovation; optimal contracts; dynamic mechanisms.;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing

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