The Optimal Scope of the Royalty Base in Patent Licensing

Gerard Llobet and Jorge Padilla ()
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Jorge Padilla: Compass Lexecon, http://www.compasslexecon.com

Working Papers from CEMFI

Abstract: There is considerable controversy about the relative merits of the apportionment rule (which results in per-unit royalties) and the entire market value rule (which results in ad-valorem royalties) as ways to determine the scope of the royalty base in licensing negotiations and disputes. This paper analyzes the welfare implication of the two rules abstracting from implementation and practicability considerations. We show that advalorem royalties tend to lead to lower prices, particularly in the context of successive monopolies. They benefit upstream producers but not necessarily hurt downstream producers. When we endogenize the investment decisions, we show that a sufficient condition for ad-valorem royalties to improve social welfare is that enticing more upstream investment is optimal or when multiple innovators contribute complementary technologies. Our findings contribute to explain why most licensing contracts include royalties based on the value of sales.

Keywords: Intellectual property; standard setting organizations; patent licensing; R&D investment. (search for similar items in EconPapers)
JEL-codes: L15 L24 O31 O34 (search for similar items in EconPapers)
Date: 2014-12
New Economics Papers: this item is included in nep-com, nep-ino, nep-ipr and nep-pr~
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: The Optimal Scope of the Royalty Base in Patent Licensing (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:cmf:wpaper:wp2014_1409

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