Royalty Rate and Industry Structure: Some Cross-Industry Evidence

14 Pages Posted: 12 Aug 2009

See all articles by Stephen Becker

Stephen Becker

Applied Economics Consulting Group, Inc.

Jack Lu

Intellectual Property Market Advisory Partners(IPMAP), LLC

Date Written: August 12, 2009

Abstract

This paper continues where Kemmerer and Lu (2008) left off, and explores the relationship between royalty rates and market structure among industries. Economists have studied innovation, R&D, and market structure for decades, and also have investigated patent licensing methods across industries. However, there is very little research on the relationships between market structure and royalty rates. In this paper, we first show that royalty rates are positively associated with price markup, a market power and market performance measure, and then move to explore the relationship between royalty rates and market structure. Two complementary sets of market structure factors are discussed. The first one is technology intensiveness or technology opportunity, on which we demonstrate that technology intensive sectors tend to have higher royalty rates than other sectors. The second set covers the traditional measures of barriers of entry. Regression analysis reveal that royalty rates exhibit a negative linear relationship with two measures of barriers to entry, the ratio of sales to capital invested and the ratio of sales to operating costs. Finally, cluster analysis is conducted to reveal group pattern among the industries studied, using royalty rate, markup, and the ratio of sales to capital invested as variables. The analysis yields four distinguishable groups of industries, and the characteristics of each group are discussed. Cluster analysis also corroborates our conclusion that while both traditional barriers of entry and technology intensiveness contribute to determining market power, one set of factors can exert more dominant and pronounced impact than the other one in a specific industry, as evidenced by media and internet/software sectors, in which market power is mainly created by their technology and know-how embedded in legally-protected IP.

Keywords: Royalty rate, market structure, market performance, market power, markup, barriers to entry, regression analysis, cluster analysis

JEL Classification: O34, O31, O32, L11

Suggested Citation

Becker, Stephen and Lu, Jiaqing, Royalty Rate and Industry Structure: Some Cross-Industry Evidence (August 12, 2009). Available at SSRN: https://ssrn.com/abstract=1447997 or http://dx.doi.org/10.2139/ssrn.1447997

Stephen Becker

Applied Economics Consulting Group, Inc. ( email )

Austin, TX
United States

Jiaqing Lu (Contact Author)

Intellectual Property Market Advisory Partners(IPMAP), LLC ( email )

13785 Research Blvd,
Suite 125
Austin, TX 78750
United States
(512)238-3088 (Phone)

HOME PAGE: http://www.ipmapllc.com

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