On the size of innovation and selling versus licensing

Antelo, Manel and Bru, Lluís (2024): On the size of innovation and selling versus licensing.

Abstract

We consider a non-producer patentholder with a cost-reducing innovation that can be used in a homogeneous duopolistic industry. To profit from the innovation, the patentholder can decide to sell it, or license it, and if the latter, the number of licences to grant as well as the corresponding contractual terms. We show that the size (value or quality) of innovation is crucial for that decision. The patentholder prefers to sell a small-sized innovation, in which case the buyer further licenses it to the competitor by means of a pure ad-valorem royalty contract. However, if the innovation is moderate or large, the patentholder retains ownership and licenses it to both firms through 2PT contracts involving per-unit royalties. Sale is shown to be welfare superior to licensing for both consumers and firms.

• Item Type: MPRA Paper
• Language: English
• Keywords: Cost-reducing innovation, sale, licensing, per-unit royalty, ad-valorem royalty, welfare
• Subjects: 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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