[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/azp/qsmswp/2302.html
   My bibliography  Save this paper

Price vs Market Share with Royalty Licensing: Incomplete Adoption of a Superior Technology with Heterogeneous Firms

Author

Listed:
  • Luca Sandrini

    (Research Centre of Quantitative Social and Management Sciences, Budapest University of Technology and Economics)

Abstract
This article shows that the usual result of full adoption of a superior technology induced by pure royalty licensing may not hold when firms have different production technologies. By modeling a licensing game with an external innovator offering per-unit royalty contracts to downstream firms, this article shows that full adoption of the innovation occurs only if i) the new technology is sufficiently more efficient than the best one available in the market or ii) if the firms have similar efficiency levels. Moreover, I disentangle two distinct forces that influence the innovator's choice: a price effect (PE) and a market share effect (MSE). The former highlight the asymmetry in willingness to pay for the new technology. The inefficient firms, which benefit the most from the cost-reducing innovation, are willing to pay a higher price than their efficient rivals to become licensees. The latter illustrates the innovator's aim to maximize the volume of royalties collected by licensing to many firms. When PE dominates MSE, the patent holder sets a higher royalty rate and attracts fewer, less efficient firms. Otherwise, if MSE dominates, the patent holder lowers the royalty rate and attracts more firms to reach as many consumers as possible. From a policy perspective, I show that royalty licensing improves consumer surplus and that the positive effect increases with the number of licensees.

Suggested Citation

  • Luca Sandrini, 2023. "Price vs Market Share with Royalty Licensing: Incomplete Adoption of a Superior Technology with Heterogeneous Firms," Discussion Papers 2302, Budapest University of Technology and Economics, Quantitative Social and Management Sciences.
    • Handle: RePEc:azp:qsmswp:2302
    as

    Download full text from publisher

    File URL: https://qsms.bme.hu/wp-content/uploads/2023/01/QSMS_DP_23_002_Sandrini.pdf
    File Function: First version, 2023
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Bruno D. Badia, 2019. "Patent Licensing and Technological Catch-Up in a Heterogeneous Duopoly," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 55(2), pages 287-300, September.
    2. Morton I. Kamien & Yair Tauman, 1986. "Fees Versus Royalties and the Private Value of a Patent," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(3), pages 471-491.
    3. Sougata Poddar & Swapnendu Banerjee & Monalisa Ghosh, 2021. "Technology transfer in spatial competition when licensees are asymmetric," Manchester School, University of Manchester, vol. 89(1), pages 24-45, January.
    4. Anna D’Annunzio & Antonio Russo, 2020. "Ad Networks and Consumer Tracking," Management Science, INFORMS, vol. 66(11), pages 5040-5058, November.
    5. Álvaro Parra, 2019. "Sequential innovation, patent policy, and the dynamics of the replacement effect," RAND Journal of Economics, RAND Corporation, vol. 50(3), pages 568-590, September.
    6. Ashish Arora & Alfonso Gambardella, 2010. "Ideas for rent: an overview of markets for technology," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 19(3), pages 775-803, June.
    7. Hernandez-Murillo, Ruben & Llobet, Gerard, 2006. "Patent licensing revisited: Heterogeneous firms and product differentiation," International Journal of Industrial Organization, Elsevier, vol. 24(1), pages 149-175, January.
    8. Ashish Arora & Andrea Fosfuri & Thomas Rønde, 2013. "Managing Licensing in a Market for Technology," Management Science, INFORMS, vol. 59(5), pages 1092-1106, May.
    9. Marshall, Guillermo & Parra, Álvaro, 2019. "Innovation and competition: The role of the product market," International Journal of Industrial Organization, Elsevier, vol. 65(C), pages 221-247.
    10. Arijit Mukherjee, 2005. "Innovation, Licensing And Welfare," Manchester School, University of Manchester, vol. 73(1), pages 29-39, January.
    11. Sen, Debapriya & Tauman, Yair, 2007. "General licensing schemes for a cost-reducing innovation," Games and Economic Behavior, Elsevier, vol. 59(1), pages 163-186, April.
    12. Sen, Debapriya & Stamatopoulos, Giorgos, 2016. "Licensing under general demand and cost functions," European Journal of Operational Research, Elsevier, vol. 253(3), pages 673-680.
    13. Gerard Llobet & Jorge Padilla, 2016. "The Optimal Scope of the Royalty Base in Patent Licensing," Journal of Law and Economics, University of Chicago Press, vol. 59(1), pages 45-73.
    14. Nancy T. Gallini & Brian D. Wright, 1990. "Technology Transfer under Asymmetric Information," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 147-160, Spring.
    15. Thomas S. Neubig & Sacha Wunsch-Vincent, 2017. "A missing link in the analysis of global value chains: cross-border flows of intangible assets, taxation and related measurement implications," WIPO Economic Research Working Papers 37, World Intellectual Property Organization - Economics and Statistics Division.
    16. Macho-Stadler, Ines & Martinez-Giralt, Xavier & David Perez-Castrillo, J., 1996. "The role of information in licensing contract design," Research Policy, Elsevier, vol. 25(1), pages 43-57, January.
    17. Judy Hsu & Longhua Liu & X. Henry Wang & Chenhang Zeng, 2019. "Ad Valorem Versus Per‐unit Royalty Licensing in a Cournot Duopoly Model," Manchester School, University of Manchester, vol. 87(6), pages 890-901, December.
    18. Fan, Cuihong & Jun, Byoung Heon & Wolfstetter, Elmar G., 2018. "Per unit vs. ad valorem royalty licensing," Economics Letters, Elsevier, vol. 170(C), pages 71-75.
    19. Can Erutku & Yves Richelle, 2007. "Optimal Licensing Contracts and the Value of a Patent," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(2), pages 407-436, June.
    20. Ashish Arora & Andrea Fosfuri & Alfonso Gambardella, 2004. "Markets for Technology: The Economics of Innovation and Corporate Strategy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262511819, April.
    21. Michael L. Katz & Carl Shapiro, 1985. "On the Licensing of Innovations," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 504-520, Winter.
    22. Stamatopoulos, Giorgos & Tauman, Tami, 2009. "On the superiority of fixed fee over auction in asymmetric markets," Games and Economic Behavior, Elsevier, vol. 67(1), pages 331-333, September.
    23. Kamien, Morton I. & Oren, Shmuel S. & Tauman, Yair, 1992. "Optimal licensing of cost-reducing innovation," Journal of Mathematical Economics, Elsevier, vol. 21(5), pages 483-508.
    24. Sen, Debapriya, 2005. "Fee versus royalty reconsidered," Games and Economic Behavior, Elsevier, vol. 53(1), pages 141-147, October.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Luca Sandrini, 2024. "Price Versus Market Share with Royalty Licensing: Incomplete Adoption of a Superior Technology with Heterogeneous Firms," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 64(2), pages 243-265, March.
    2. Chen, Jingxian & Liang, Liang & Yao, Dong-qing, 2017. "An analysis of intellectual property licensing strategy under duopoly competition: Component or product-based?," International Journal of Production Economics, Elsevier, vol. 193(C), pages 502-513.
    3. Sen, Debapriya & Tauman, Yair, 2018. "Patent licensing in a Cournot oligopoly: General results," Mathematical Social Sciences, Elsevier, vol. 96(C), pages 37-48.
    4. Ismail Saglam, 2023. "Licensing cost‐reducing innovations under supply function competition," Bulletin of Economic Research, Wiley Blackwell, vol. 75(1), pages 180-201, January.
    5. Amir, Rabah & Encaoua, David & Lefouili, Yassine, 2014. "Optimal licensing of uncertain patents in the shadow of litigation," Games and Economic Behavior, Elsevier, vol. 88(C), pages 320-338.
    6. Debapriya Sen & Giorgos Stamatopoulos, 2009. "Technology Transfer Under Returns To Scale," Manchester School, University of Manchester, vol. 77(3), pages 337-365, June.
    7. Stefano Colombo & Luigi Filippini, 2015. "Patent Licensing with Bertrand Competitors," Manchester School, University of Manchester, vol. 83(1), pages 1-16, January.
    8. Cheng-Tai Wu & Cheng-Hau Peng & Tsung-Sheng Tsai, 2021. "Signaling in Technology Licensing with a Downstream Oligopoly," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 58(4), pages 531-559, June.
    9. Giebe, Thomas & Wolfstetter, Elmar, 2008. "License auctions with royalty contracts for (winners and) losers," Games and Economic Behavior, Elsevier, vol. 63(1), pages 91-106, May.
    10. Luca Sandrini, 2023. "Innovation, competition, and incomplete adoption of a superior technology," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 32(6), pages 783-803, August.
    11. Sen, Debapriya & Tauman, Yair, 2007. "General licensing schemes for a cost-reducing innovation," Games and Economic Behavior, Elsevier, vol. 59(1), pages 163-186, April.
    12. Badia, Bruno D. & Tumendemberel, Biligbaatar, 2016. "On the licensing of a technology with unknown use," Games and Economic Behavior, Elsevier, vol. 100(C), pages 220-233.
    13. Ma, Siyu & Sen, Debapriya & Tauman, Yair, 2022. "Optimal patent licensing: from three to two part tariffs," MPRA Paper 111624, University Library of Munich, Germany.
    14. Sudipto Bhattacharya & Claude d’Aspremont & Sergei Guriev & Debapriya Sen & Yair Tauman, 2014. "Cooperation in R&D: Patenting, Licensing, and Contracting," International Series in Operations Research & Management Science, in: Kalyan Chatterjee & William Samuelson (ed.), Game Theory and Business Applications, edition 2, chapter 0, pages 265-286, Springer.
    15. Creane, Anthony & Ko, Chiu Yu & Konishi, Hideo, 2013. "Choosing a licensee from heterogeneous rivals," Games and Economic Behavior, Elsevier, vol. 82(C), pages 254-268.
    16. Saracho, Ana I., 2011. "Licensing information goods," International Journal of Industrial Organization, Elsevier, vol. 29(2), pages 187-199, March.
    17. Kim, Seung-Leul & Lee, Sang-Ho, 2021. "Optimal tariffs with emissions taxes under non-restrictive two-part licensing strategies by a foreign eco-competitor," MPRA Paper 108496, University Library of Munich, Germany.
    18. Marta San Martín & Ana I. Saracho, 2015. "Optimal Two-part Tariff Licensing Mechanisms," Manchester School, University of Manchester, vol. 83(3), pages 288-306, June.
    19. Mukherjee, Arijit, 2010. "Licensing a new product: Fee vs. royalty licensing with unionized labor market," Labour Economics, Elsevier, vol. 17(4), pages 735-742, August.
    20. Bagchi, Aniruddha & Mukherjee, Arijit, 2014. "Technology licensing in a differentiated oligopoly," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 455-465.

    More about this item

    Keywords

    Innovation; Licensing; Royalties; Price Effect; Market Share Effect;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:azp:qsmswp:2302. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Luca Sandrini (email available below). General contact details of provider: https://edirc.repec.org/data/gtbmehu.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.