Welfare-Optimal Patent Royalties When Imitation Is Costly

38 Pages Posted: 18 Nov 2011 Last revised: 15 Feb 2017

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

Date Written: February 10, 2017

Abstract

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 imitation, facilitating unregulated monopoly, or yield an aggregate-zero-profit "efficient" 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. Efficient duopoly yields higher welfare than monopoly for sufficiently low invention cost, and may also yield higher welfare than a prize system. Interestingly, royalty payments may be negative. Because of this, efficient duopoly may not be feasible if the planner must instead direct the courts to use such royalties.

Keywords: patents, damages, royalties, invention, entry

JEL Classification: K2, O3

Suggested Citation

Leiva Bertran, Fernando J and Turner, John L., Welfare-Optimal Patent Royalties When Imitation Is Costly (February 10, 2017). Available at SSRN: https://ssrn.com/abstract=1961283 or http://dx.doi.org/10.2139/ssrn.1961283

Fernando J Leiva Bertran

Arizona State University ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

John L. Turner (Contact Author)

University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics ( email )

Athens, GA 30602-6254
United States

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