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The economic sense of royalty rates

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  • Elli Malki

    (Financial-Tip)

Abstract

Academic institutions, involved in technology transfer to industry, are always concerned about the "fairness" of the royalty rate payable to them. The common method used by practitioners is the "Industry-Standard Approach" which is based mainly on past experience. However such approach is very simplistic and fails to take into account importnat factors that effect royalty rate calculations. By using a simple financial model, the article demonstrates that expected sales volume of the end product is a key determinant of royalty rates. Higher expected sales volume enables the licensee to pay higher royalties to the licensor, while keeping its required rate of return unchanged. This point is totally overlooked by the "Industry-Standard Approach" and moreover it contradicts a commonly used practice to reduce the royalty rates with the increase in sales.

Suggested Citation

  • Elli Malki, 1997. "The economic sense of royalty rates," Finance 9709003, EconWPA.
  • Handle: RePEc:wpa:wuwpfi:9709003
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    More about this item

    Keywords

    Royalties Technology Transfer R&D Licensing;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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