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

56 Pages Posted: 16 May 2018 Last revised: 7 Oct 2019

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

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

Suggested Citation

Kankanhalli, Gaurav and Kwan, Alan, Bargaining Power in the Market for Intellectual Property: Evidence from 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

HOME PAGE: http://gauravkankanhalli.com

Alan Kwan

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

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