Per unit vs. ad valorem royalty licensing

Cuihong Fan, Byoung Heon Jun, Elmar G. Wolfstetter

Research output: Contribution to journalArticlepeer-review

12 Citations (Scopus)


We consider licensing of non-drastic innovations by a patent holder who interacts with a potential licensee in a downstream market. We compare two kinds of license contracts: per unit and ad valorem royalties, combined with fixed fees. Assuming that antitrust authorities apply the same principle to review ad valorem licensing which they apply to per unit licensing, we show that per unit licensing is more profitable if the licensor is more efficient in using the innovation, whereas ad valorem licensing is more profitable if the licensee is more efficient. This explains why and when these licensing schemes should be observed.

Original languageEnglish
Pages (from-to)71-75
Number of pages5
JournalEconomics Letters
Publication statusPublished - 2018 Sept


  • Innovation
  • Optimal contracts
  • Patent licensing
  • R&D
  • Royalty contracts

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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