On the size of innovation and selling versus licensing

Manel Antelo and Lluis Bru

MPRA Paper from University Library of Munich, Germany

Abstract: We consider a non-producer patentholder with a cost-reducing innovation that can be used in a homogeneous duopolistic industry. To profit from the innovation, the patentholder can decide to sell it, or license it, and if the latter, the number of licences to grant as well as the corresponding contractual terms. We show that the size (value or quality) of innovation is crucial for that decision. The patentholder prefers to sell a small-sized innovation, in which case the buyer further licenses it to the competitor by means of a pure ad-valorem royalty contract. However, if the innovation is moderate or large, the patentholder retains ownership and licenses it to both firms through 2PT contracts involving per-unit royalties. Sale is shown to be welfare superior to licensing for both consumers and firms.

Keywords: Cost-reducing innovation; sale; licensing; per-unit royalty; ad-valorem royalty; welfare (search for similar items in EconPapers)
JEL-codes: L13 L24 (search for similar items in EconPapers)
Date: 2024-01
New Economics Papers: this item is included in nep-com, nep-des, nep-gth, nep-ino, nep-ipr, nep-mic and nep-sbm
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