The Economic Sense of Royalty Rates

5 Pages Posted: 6 Aug 1997

See all articles by Elli Malki

Elli Malki

Financial-Tip; Rothberg International School of the HU - MA in Nonprofit Management and Leadership; Hebrew University - M.A. in Management of Nonprofit and Community Organizations

Date Written: September 1997

Abstract

Academic institutions, involved in technology transfer to industry, are always concerned about the "fairness" of the royalty rate payable to them. The common method used by practitioners is the "Industry-Standard Approach" which is based mainly on past experience. However, such an approach is very simplistic and fails to take into consideration important factors that affect royalty rate calculations. By using a simple financial model, the article demonstrates that expected sales volume of the end product is a key determinant of royalty rates. Increasing sales volume enables the licensee to increase the royalties payable to the licenser while preserving its required rate of return. This point is totally overlooked by the "Industry-Standard Approach" and, moreover, contradicts a commonly used practice to reduce the royalty rates with the increase in sales.

JEL Classification: L15, L31, G30, G31, G32, L65

Suggested Citation

Malki, Elli, The Economic Sense of Royalty Rates (September 1997). Available at SSRN: https://ssrn.com/abstract=41236 or http://dx.doi.org/10.2139/ssrn.41236

Elli Malki (Contact Author)

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HOME PAGE: http://www.financial-tip.co.il

Hebrew University - M.A. in Management of Nonprofit and Community Organizations ( email )

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Israel
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HOME PAGE: http://www.financial-tip.co.il

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