Simultaneous signaling and output royalties in licensing contracts

No E2004/53, Economic Working Papers at Centro de Estudios Andaluces from Centro de Estudios Andaluces

Abstract: This paper analyzes a two-period licensing model where an upstream patent holder licenses an innovation, by per-unit output royalty contracts, to several downstream licensees. Such firms compete in Cournot fashion at the product market and each firm's cost is directly unobservable for third parties. In such a context, the optimal royalties when licensees' outputs signal their costs through the output produced on the first period are examined and compared with those they would be if licensees' outputs were not a signal of such costs. It is shown that low-cost licensees have an incentive to misrepresent themselves as high-cost firms. This leads, when the efficiency gap between licensees is low enough, the first-period per-unit output royalties to be higher (resp. lower) than they would be if firms' output were not a signal of their costs provided that the probability of licensees being low-cost producers is very high (resp. low or moderate). Results are extended to the case of a large efficiency gap between licensees, and that of downstream Bertrand licensees who produce differentiated goods using the innovation and may signal their marginal costs through price choices of the first period.

Keywords: Patent licensing; per-unit output royalties; unobservable costs; signaling and no-signaling equilibrium (search for similar items in EconPapers)
JEL-codes: D45 D82 O32 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2004
New Economics Papers: this item is included in nep-ind and nep-mic
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