The Optimal Scope of the Royalty Base in Patent Licensing

43 Pages Posted: 29 Mar 2014 Last revised: 4 May 2014

See all articles by Gerard Llobet

Gerard Llobet

Centre for Monetary and Financial Studies (CEMFI); Centre for Economic Policy Research (CEPR)

Jorge Padilla

Compass Lexecon

Date Written: April 19, 2014

Abstract

There is considerable controversy about the relative merits of the apportionment rule (which results in per-unit royalties) and the entire market value rule (which results in ad-valorem royalties) as ways to determine the scope of the royalty base in licensing negotiations and disputes. This paper analyzes the welfare implication of the two rules abstracting from implementation and practicability considerations. We show that ad-valorem royalties tend to lead to lower prices, particularly in the context of successive monopolies. They benefit upstream producers but not necessarily hurt downstream producers. When we endogenize the investment decisions, we show that ad-valorem royalties improve social welfare when enticing upstream investment is optimal or when multiple innovators contribute complementary technologies. Our findings contribute to explain why most licensing contracts include royalties based on the value of sales.

Keywords: Intellectual Property, Standard Setting Organizations, Patent Licensing, R&D Investment

JEL Classification: L15, L24, O31, O34

Suggested Citation

Llobet, Gerard and Padilla, Jorge, The Optimal Scope of the Royalty Base in Patent Licensing (April 19, 2014). Available at SSRN: https://ssrn.com/abstract=2417216 or http://dx.doi.org/10.2139/ssrn.2417216

Gerard Llobet (Contact Author)

Centre for Monetary and Financial Studies (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
SPAIN
34 91 429 0551 (Phone)
34 91 429 1056 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Jorge Padilla

Compass Lexecon ( email )

Paseo de la Castellana 7
Madrid, 28046
Spain

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