Welfare-optimal patent royalties when imitation is costly

Fernando J. Leiva Bertran and John Turner ()

Journal of Economic Behavior & Organization, 2017, vol. 137, issue C, 457-475

Abstract: We identify welfare-optimal patent royalties in a model of costly imitation, entry and imperfect competition. When the social planner may impose a compulsory license, optimal royalties either blockade imitation, facilitating unregulated monopoly, or yield an aggregate-zero-profit efficient duopoly. When duopoly is optimal, the optimal per-unit royalty pins the equilibrium price at the aggregate average cost and the optimal fixed royalty shifts surplus so the patentee and imitator break even. Efficient duopoly yields higher welfare than monopoly for sufficiently low invention cost, and may also yield higher welfare than a prize system. Interestingly, royalty payments may be negative. Because of this, efficient duopoly may not be feasible if the planner must instead direct the courts to use such royalties.

Keywords: Damages; Entry; Invention; Patents; Prize system; Royalties (search for similar items in EconPapers)
JEL-codes: K2 L1 O3 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:137:y:2017:i:c:p:457-475

DOI: 10.1016/j.jebo.2017.03.014

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