The Role of Royalty Fee in NFT Markets

70 Pages Posted: 23 May 2023

See all articles by Wenxiao Yang

Wenxiao Yang

University of California, Berkeley - Haas School of Business

Zijun (June) Shi

Hong Kong University of Science & Technology (HKUST)

Song Lin

Hong Kong University of Science & Technology (HKUST) - Department of Marketing

Date Written: May 5, 2023

Abstract

Royalty payment has been under heated debate in both the traditional art market and the newly emerged non-fungible tokens (NFTs) markets. In this paper, we investigate the role of royalty payments in the trading market with creators and buyers and explore how NFT platforms should design royalty policies to balance the incentives of both sides. We present three key findings. First, royalty payments can harm NFT creators and the overall market efficiency when creators and buyers hold symmetric information about the artwork's future value. Second, when information asymmetry exists with creators possessing more information about the value of the artwork, we demonstrate that royalty payments can enhance market efficiency by retaining high-quality NFT creators while excluding low-quality ones. Third, when the platform allows creators to commit to a royalty rate, creators may differentiate themselves based on their NFTs' quality, with low-quality creators setting higher prices and lower royalty rates, and high-quality creators opting for lower prices and higher royalty rates. Our findings shed light on how royalty payments can influence the welfare of different players in an NFT market, and the insights can also apply to the traditional art market.

Keywords: NFT; art market; platform design; royalty fee

Suggested Citation

Yang, Wenxiao and Shi, Zijun (June) and Lin, Song, The Role of Royalty Fee in NFT Markets (May 5, 2023). Available at SSRN: https://ssrn.com/abstract=4449512 or http://dx.doi.org/10.2139/ssrn.4449512

Wenxiao Yang (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Zijun (June) Shi

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Song Lin

Hong Kong University of Science & Technology (HKUST) - Department of Marketing ( email )

LSK 4005, HKUST Business School
Clear Water Bay
Hong Kong, Hong Kong, China na
Hong Kong
Clear Water Bay (Fax)

HOME PAGE: http://www.bm.ust.hk/mark/staff/song_lin.html

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