An Empirical Analysis of Bargaining Power in Licensing Contract Terms

52 Pages Posted: 16 May 2018 Last revised: 24 Sep 2018

See all articles by Gaurav Kankanhalli

Gaurav Kankanhalli

Cornell University, Samuel Curtis Johnson Graduate School of Management, Department of Finance

Alan Kwan

The University of Hong Kong

Date Written: August 1, 2018

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.

Suggested Citation

Kankanhalli, Gaurav and Kwan, Alan, An Empirical Analysis of Bargaining Power in Licensing Contract Terms (August 1, 2018). Available at SSRN: https://ssrn.com/abstract=3171920 or http://dx.doi.org/10.2139/ssrn.3171920

Gaurav Kankanhalli (Contact Author)

Cornell University, Samuel Curtis Johnson Graduate School of Management, Department of Finance ( email )

Ithaca, NY
United States

Alan Kwan

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

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