Licensing a common value innovation when signaling strength may backfire

Cuihong Fan, Byoung Heon Jun, Elmar G. Wolfstetter

Research output: Contribution to journalArticlepeer-review

6 Citations (Scopus)


This paper reconsiders the licensing of a common value innovation to a downstream duopoly, assuming firms observe imperfect signals of the cost reduction induced by the innovation. The innovator adopts a direct revelation mechanism and awards an unrestricted license to the firm that reports the highest signal and a royalty contract to the other. Firms may signal strength to their rivals through exaggerated messages, which may however backfire, and give rise to higher royalty payments. We provide sufficient conditions for truthful implementation, and for the profitability of adding royalty contracts to what is otherwise a first-price license auction.

Original languageEnglish
Pages (from-to)215-244
Number of pages30
JournalInternational Journal of Game Theory
Issue number1
Publication statusPublished - 2014 Feb

Bibliographical note

Funding Information:
We would like to thank Jinwoo Kim, Jae Nahm, Kiho Yoon, two anonymous referees, the Associate Editor, and the Co-Editor Vijay Krishna for comments. Research support by the National Research Foundation of Korea funded by the Korean Government (NRF-2010-330-B00085), the Deutsche Forschungsgemeinschaft (DFG), SFB Transregio 15, “Governance and Efficiency of Economic Systems,” the Humanities and Social Sciences Research Foundation of Chinese Ministry of Education (Grant 09YJA790133), and the “Innovation Program of Shanghai Municipal Education Commission” (Grant 12ZS076) is gratefully acknowledged.


  • Auctions
  • Innovation
  • Licensing
  • Mechanism design
  • Patents

ASJC Scopus subject areas

  • Statistics and Probability
  • Mathematics (miscellaneous)
  • Social Sciences (miscellaneous)
  • Economics and Econometrics
  • Statistics, Probability and Uncertainty


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