Bargaining Power in the Market for Intellectual Property: Evidence from Licensing Contract Terms

Abstract

We study a novel database of intellectual property (IP) licensing agreements sourced from filings made by publicly-listed corporations, a large fraction of which firms (initially) disclose with redacted terms. In contrast to the benchmark that IP quality alone determines the pricing of IP, we argue that bargaining power plays a critical role and explains several patterns in observed royalty rates. Licensors with differentiated technology and high market power charge higher royalty rates, while larger-than-rival licensees pay lower royalty rates. Licensors command premium royalty rates for contractual features such as exclusivity. Finally, we employ this framework and setting to understand pricing implications of non-disclosure: licensors redact when they transact at lower royalty rates, consistent with preserving bargaining power for future negotiations. Our findings offer a new explanation for innovator secrecy and have several practical takeaways for transfer pricing and patent litigation.

Keywords: Intellectual Property Licensing, Bargaining Power, Disclosure

JEL Classification: O30, O32, O34, L24