Patent Licensing from a High‐Cost Firm to a Low‐Cost Firm*

Abstract

We depart from the standard framework and study optimal patent licensing under Cournot duopoly where the technology transfer takes place from an innovative firm, which is relatively inefficient in terms of cost of production, to its cost-efficient rival. Interestingly, we find even a drastic technology is licensed and the optimal licensing arrangement always involves a two-part tariff (i.e. a fixed-fee plus a linear per unit output royalty). Under nondrastic innovation, the two-part tariff is optimal when the cost difference between the firms is moderate. Our framework also helps to bridge the gap between optimal licensing schemes for 'insider' and 'outsider' patentees.* The authors are deeply indebted to the editor and two anonymous referees for the most helpful comments and suggestions. They would also like to thank the workshop (Innovations and Patent Licensing) participants at the SUNY, Stony Brook (2006); and the seminar participants at

Cost asymmetry and vertical product licensing

“…This finding is in parallel to the result in Li and Song (2009) and Poddar and Sinha (2010) that licensing is beneficial to social welfare.…”

“…When b is large, the increase in the willingness to pay is small and is dominated by the second effect under royalty licensing. This finding is of interest as it is sharply in contrast to the result in Poddar and Sinha (2010) in which licensing never hurts consumer surplus as the total sales never decrease after licensing. This result is also different from that in Li and Song (2009).…”

“…In this paper, we have filled the gap in the quality licensing literature and have shown that the optimal licensing contract is sensitive to the cost asymmetry of the two firms. This finding is also in parallel to that in Poddar and Sinha (2010), but their focus is on cost-reducing licensing. Based on the above result, we can establish the following proposition:…”

“…Based on the conventional wisdom and given that firms produce an identical good, it is generally believed that a fixed-fee contract is optimal for an outsider licensor (Kamien and Tauman 1986;Katz and Shapiro 1986;Kamien, Oren, and Tauman 1992); by contrast, Wang (1998) shows that a per-unit royalty rate dominates if the licensor is an insider (also see Kamien and Tauman 2002). Poddar and Sinha (2010) propose that a licensor firm may transfer its process innovation to its costefficient rival via a royalty (two-part tariff, fixed-fee) when its cost disadvantage is low (moderate, high).…”

Licensing a new product: Fee vs. royalty licensing with unionized labor market

“…There is a related literature which shows the superiority of royalty licensing and licensing with a combination of fixed-fee and royalty when the licenser and the licensees compete in the product market (see, e.g., Rockett, 1990;Wang, 1998Wang, , 2002Wang and Yang, 1999;Filippini, 2001;Mukherjee and Balasubramanian, 2001;Faulí-Oller and Sandonis, 2002;Fosfuri, 2004;Kabiraj, 2005;Poddar and Sinha, 2005;Mukherjee, 2007). The competition softening effect of output royalty makes the royalty licensing preferable than fixed-fee licensing if the licenser and the licensees compete in the product market.…”