Licensing Process Innovations when Losers’ Messages Determine Royalty Rates

22 Pages Posted: 30 Aug 2011 Last revised: 31 Oct 2017

See all articles by Cuihong Fan

Cuihong Fan

Shanghai University of Finance and Economics

Byoung Jun

Korea University

Elmar Wolfstetter

Humboldt University of Berlin - Faculty of Economics; Korea University - College of Economics and Commerce; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: August 28, 2011

Abstract

We consider a licensing mechanism for process innovations that awards a limited number of fixed-fee licenses to those firms that report the highest cost reductions, combined with royalty licenses to others. Firms' messages are dual signals: the message of those who win a fixed-fee license signals their cost reduction to rival firms, whereas losers' message influence the royalty rate set by the innovator. We derive conditions for existence of a truth-telling equilibrium, explain why a sufficiently high reserve price is essential for such an equilibrium, and show that the innovator generally benefits from the proposed mechanism.

Keywords: Patents, licensing, auctions, royalty, innovation, R&D, mechanism design

JEL Classification: D21, D43, D44, D45

Suggested Citation

Fan, Cuihong and Jun, Byoung and Wolfstetter, Elmar G., Licensing Process Innovations when Losers’ Messages Determine Royalty Rates (August 28, 2011). Games and Economic Behavior, Vol. 82, 2013. Available at SSRN: https://ssrn.com/abstract=1918417 or http://dx.doi.org/10.2139/ssrn.1918417

Cuihong Fan

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

Byoung Jun

Korea University ( email )

1 Anam-dong 5 ka
Seoul, 136-701
Korea, Republic of (South Korea)

Elmar G. Wolfstetter (Contact Author)

Humboldt University of Berlin - Faculty of Economics ( email )

Institut für Wirtschaftstheorie I
Spandauer Strasse 1
Berlin
Germany
+49 30 2093 5652/3 (Phone)
+49 30 2093 5619 (Fax)

HOME PAGE: http://www2.hu-berlin.de/wt1wo/staff/wolfstetter/index.html

Korea University - College of Economics and Commerce ( email )

Anam-dong, Sungbuk-Ku
Seoul, 136-701
Korea

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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