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Per Unit vs. Ad Valorem Royalty Licensing

Author

Listed:
  • 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)

Abstract

We consider the licensing of a non-drastic innovation by an innovator who interacts with a potential licensee in a downstream Cournot market. We compare two kinds of license contracts: per unit and ad valorem, combined with fixed fees. Assuming that antitrust authorities apply the same principle to review ad valorem royalty license contracts which they apply to per unit royalty license contracts, we show that per unit royalty licensing is more profitable if the licensor is more efficient in using the innovation, whereas ad valorem royalty licensing is more profitable if the licensee is more efficient. This explains why and when these licensing schemes should be observed.

Suggested Citation

  • Cuihong Fan & Byoung Heon Jun & Elmar G. Wolfstetter, 2017. "Per Unit vs. Ad Valorem Royalty Licensing," Discussion Paper Series 1706, Institute of Economic Research, Korea University.
  • Handle: RePEc:iek:wpaper:1706
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    References listed on IDEAS

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    1. 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. 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.
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    Cited by:

    1. Antelo, Manel & Bru, Lluís, 2020. "Per-unit versus ad-valorem royalty licensing in a Stackelberg market," MPRA Paper 105742, University Library of Munich, Germany.
    2. Carlo Capuano & Iacopo Grassi, 2020. "Imperfect patent protection, licensing, and willingness to pay for the innovation," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 47(2), pages 333-359, June.
    3. Marta Montinaro & Rupayan Pal & Marcella Scrimitore, 2020. "Per Unit and Ad Valorem Royalties in a Patent Licensing Game," Working Papers 2020.14, Fondazione Eni Enrico Mattei.
    4. Wang, Wei & Lyu, Gaoyan & Cui, Wei & Li, Yongjian, 2021. "Strategic technology commercialization in the supply chain under network effects," International Journal of Production Economics, Elsevier, vol. 231(C).
    5. Montinaro, Marta & Scrimitore, Marcella, 2019. "Per unit and ad valorem royalties in a patent licensing game," MPRA Paper 96642, University Library of Munich, Germany.
    6. Shin Kishimoto, 2020. "The welfare effect of bargaining power in the licensing of a cost-reducing technology," Journal of Economics, Springer, vol. 129(2), pages 173-193, March.

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    More about this item

    Keywords

    Innovation; patent licensing; royalty contracts.;
    All these keywords.

    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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