Licensing process innovations when losers' messages determine royalty rates

Cuihong Fan, Byoung Heon Jun, Elmar G. Wolfstetter

Research output: Contribution to journalArticlepeer-review

10 Citations (Scopus)

Abstract

We consider a licensing mechanism for process innovations that awards a limited number of unrestricted licenses to those firms that report the highest cost reductions, combined with royalty licenses to others. Firms' messages are dual signals of their cost reductions: the message of those who win an unrestricted license signals their cost reduction to rival firms, while losers' messages influence the royalty rate set by the innovator. We explain why a sufficiently high threshold level for awarding the unrestricted license is essential to induce truth-telling, show that the innovator generally benefits from the proposed mechanism, and derive conditions for implementability by a modified second-price auction.

Original languageEnglish
Pages (from-to)388-402
Number of pages15
JournalGames and Economic Behavior
Volume82
DOIs
Publication statusPublished - 2013 Nov

Bibliographical note

Funding Information:
Financial support was received from the Humanities and Social Sciences Research Foundation of the Ministry of Education of China (Grant 09YJA790133 ) and the “ Innovation Program of Shanghai Municipal Education Commission ” (Grant 12ZS076 ), the National Research Foundation of Korea funded by the Korean Government ( NRF-2010-330-B00085 ), and the Deutsche Forschungsgemeinschaft (DFG) , SFB Transregio 15, “Governance and Efficiency of Economic Systems.” Detailed comments by the Advisory Editor and the anonymous referees and discussions with Michael Peters and David Salant are gratefully acknowledged.

Keywords

  • Auctions
  • Innovation
  • Licensing
  • Mechanism design
  • Patents
  • R&D
  • Royalty

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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