An Empirical Analysis of Bargaining Power in Licensing Contract Terms

Abstract

This paper studies a new, large sample of intellectual property licensing agreements, sourced from filings by public corporations, under the lens of a surplus-bargaining framework. This framework motivates several new empirical findings on the determinants of royalty rates. We find that licensors command premium royalty rates for exclusivity (particularly in competitive industries), and for exchange of know-how. Licensors with differentiated technology and high market power charge higher royalty rates, while larger-than-rival licensees pay lower rates. Finally, using this framework, we study how the nature of disclosure by public firms affects transaction value. Firms transact at lower royalty rates when they redact contracts, preserving pricing power for future negotiations. This suggests that practitioners modeling fair value in transfer pricing and litigation contexts based on publicly-known comparables are over-estimating royalties, potentially impacting substantial cumulative transaction value.