Welfare-Optimal Patent Royalties When Imitation Is Costly
Fernando J Leiva Bertran
Arizona State University
John L. Turner
University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics
June 15, 2016
We identify welfare-optimal patent royalties in a model of costly imitation, entry and imperfect competition. When the social planner may impose a compulsory license, optimal royalties either blockade entry, facilitating unregulated monopoly, or yield an aggregate-zero-profit duopoly. When duopoly is optimal, the optimal per-unit royalty pins the equilibrium price at the aggregate average cost and the optimal fixed royalty shifts surplus so the patentee and imitator break even. Interestingly, royalty payments with such royalties may be negative. Because of this, aggregate-zero-profit duopoly may be impossible to achieve if the planner must instead direct the courts to use such royalties.
Number of Pages in PDF File: 29
Keywords: patents, damages, royalties, invention, entry
JEL Classification: K2, O3
Date posted: November 18, 2011 ; Last revised: August 15, 2016
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