Licensing Process Innovations when Losers’ Messages Determine Royalty Rates
22 Pages Posted: 30 Aug 2011 Last revised: 31 Oct 2017
Date Written: August 28, 2011
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: Suggested Citation