Fees Versus Royalties and the Private Value of a Patent

  • Kamien M
  • Tauman Y
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Abstract

We compare how much profit an owner of a patented cost-reducing invention can realize by licensing it to an oligopolistic industry producing a homogeneous product, by means of a fixed fee or a per unit royalty. Our analysis is conducted in terms of a noncooperative game involving n + 1 players: the inventor and the n firms. In this game the inventor acts as a Stackelberg leader, and it has a unique subgame perfect equilibrium in pure strategies. It is shown that licensing by means of a fixed fee is superior to licensing by means of a royalty for both the inventor and consumers. Only a ‘drastic’ innovation is licensed to a single producer. [ABSTRACT FROM AUTHOR]

Author-supplied keywords

  • COST control
  • EQUILIBRIUM (Economics)
  • OLIGOPOLIES
  • PATENTS
  • PROFIT

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Authors

  • Morton I Kamien

  • Yair Tauman

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