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)


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
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.


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

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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