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

Journal of Empirical Legal Studies (Forthcoming)

72 Pages Posted: 16 May 2018 Last revised: 8 Jan 2024

See all articles by Gaurav Kankanhalli

Gaurav Kankanhalli

University of Pittsburgh - Katz Graduate School of Business

Alan Kwan

The University of Hong Kong

Date Written: August 1, 2018

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 between licensing counterparties plays a critical role in explaining 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 contract exclusivity, especially in competitive markets. Finally, we employ this framework and setting to understand the pricing implications of nondisclosure: licensors redact payment terms 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: IP Licensing, Bargaining Power, Patent Litigation, Disclosure, Royalty Rates

JEL Classification: O30, O32, O34, L24

Suggested Citation

Kankanhalli, Gaurav and Kwan, Alan, Bargaining Power in the Market for Intellectual Property: Evidence from Licensing Contract Terms (August 1, 2018). Journal of Empirical Legal Studies (Forthcoming), Available at SSRN: https://ssrn.com/abstract=3171920 or http://dx.doi.org/10.2139/ssrn.3171920

Gaurav Kankanhalli (Contact Author)

University of Pittsburgh - Katz Graduate School of Business ( email )

Pittsburgh, PA 15260
United States

Alan Kwan

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

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