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Per Unit vs. Ad Valorem Royalty Licensing

Cuihong Fan (), Byoung Heon Jun () and Elmar Wolfstetter ()
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Cuihong Fan: Shanghai University of Finance and Economics
Byoung Heon Jun: Department of Economics, Korea University, Seoul, Republic of Korea

No 1706, Discussion Paper Series from Institute of Economic Research, Korea University

Abstract: We consider the licensing of a non-drastic innovation by an innovator who interacts with a potential licensee in a downstream Cournot market. We compare two kinds of license contracts: per unit and ad valorem, combined with fixed fees. Assuming that antitrust authorities apply the same principle to review ad valorem royalty license contracts which they apply to per unit royalty license contracts, we show that per unit royalty licensing is more profitable if the licensor is more efficient in using the innovation, whereas ad valorem royalty licensing is more profitable if the licensee is more efficient. This explains why and when these licensing schemes should be observed.

Keywords: Innovation; patent licensing; royalty contracts. (search for similar items in EconPapers)
JEL-codes: D21 D43 D44 D45 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-ind, nep-ino, nep-ipr and nep-mic
Date: 2017
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http://econ.korea.ac.kr/~ri/WorkingPapers/w1706.pdf (application/pdf)

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Journal Article: Per unit vs. ad valorem royalty licensing (2018) Downloads
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