Per Unit vs. Ad Valorem Royalty Licensing
8 Pages Posted: 22 Jun 2018 Last revised: 29 Jun 2018
Date Written: June 9, 2018
We consider licensing of non-drastic innovations by a patent holder who interacts with a potential licensee in a downstream market. We compare two kinds of license contracts: per unit and ad valorem royalties, combined with fixed fees. Assuming that antitrust authorities apply the same principle to review ad valorem licensing which they apply to per unit licensing, we show that per unit licensing is more profitable if the licensor is more efficient in using the innovation, whereas ad valorem licensing is more profitable if the licensee is more efficient. This explains why and when these licensing schemes should be observed.
Keywords: innovation, patent licensing, royalty contracts
JEL Classification: D21, L13, L24, L41
Suggested Citation: Suggested Citation