Equivalence between fixed fee and ad valorem profit royalty

Colombo, Stefano and Ma, Siyu and Sen, Debapriya and Tauman, Yair (2021): Equivalence between fixed fee and ad valorem profit royalty. Forthcoming in: Journal of Public Economic Theory

Abstract

For an outside innovator with a finite number of buyers of the innovation, this paper compares two licensing schemes: (i) fixed fee, in which a licensee pays a fee to the innovator and (ii) ad valorem profit royalty, in which a licensee leaves a fraction of its profit with the innovator. We show these two schemes are equivalent in that for any number of licenses the innovator puts for sale, these two schemes give the same licensing revenue. We obtain this equivalence result in a general model with minimal structure. It is then applied in a Cournot oligopoly for an outside innovator. Finally, in a Cournot duopoly it is shown that when the innovator is one of the incumbent firms rather than an outsider, the equivalence result does not hold.

This version corrects some typos of the published version. Specifically: (i) the correct statement in Remark 6 is for linear demand fixed fee is superior for small n while per unit royalty is superior for large n (page 14) and (ii) gives correct statements on the properties of the function H(p,v) (Appendix, page 20).

• Item Type: MPRA Paper
• Language: English
• Keywords: fixed fee. advlorem profit royalty, licensing schemes, auction, posted price, outside innovator
• Subjects: D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D44 - Auctions; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D45 - Rationing ; Licensing; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L24 - Contracting Out ; Joint Ventures ; Technology Licensing

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