Two-part tariff licensing mechanisms

Marta San Martín Lizarralde and Ana Saracho

IKERLANAK from Universidad del País Vasco - Departamento de Fundamentos del Análisis Económico I

Abstract: Most of the patent licensing agreements that are observed include royalties, in particular per-unit or ad valorem royalties. This paper shows that in a differ entiated duopoly that competes á la Cournot the optimal contract for an internal patentee always includes a positive royalty. Moreover, we show that the patentee would prefer to use ad valorem royalties rather than per-unit royalties when goods are complements or when they are substitutes and the degree of differentiation is suffciently low. The reason is that by including an ad valorem royalty in the licensing contract the patentee can commit strategically to be more (less) aggressive when goods are complements (substitutes) since his licensing revenues become increasing with the price of output of his rival. As a result, licensing may hurt consumers although it always increases social welfare.

Keywords: patent licensing; royalty; Cournot duopoly; product differentiation (search for similar items in EconPapers)
Date: 2012-06
New Economics Papers: this item is included in nep-com, nep-ino, nep-ipr and nep-pr~
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:ehu:ikerla:8632

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Dpto. de Fundamentos del Análisis Económico I, Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain

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