Licensing a Common Value Innovation When Signaling Strength May Backfire
26 Pages Posted: 7 Nov 2013 Last revised: 29 Oct 2017
Date Written: November 7, 2013
This paper reconsiders the licensing of a common value innovation to a downstream duopoly, assuming firms observe imperfect signals of the cost reduction induced by the innovation. The innovator adopts a direct revelation mechanism and awards an unrestricted license to the firm that reports the highest signal and a royalty contract to the other. Firms may signal strength to their rivals through exaggerated messages, which may however backfire, and give rise to higher royalty payments. We provide sufficient conditions for truthful implementation, and for the profitability of adding royalty contracts to what is otherwise a first-price license auction.
Keywords: patents, licensing, auctions, innovation, mechanism design
JEL Classification: D21, D43, D44, D45
Suggested Citation: Suggested Citation