Fixed‐fee vs. royalty licensing under asymmetric demand information

When there is asymmetry in the market size information held by an R&D firm outside a market that possesses new technology for lowering production costs, along with a monopoly firm that engages in production activities inside the market, the producing firm has an incentive to make its market size look smaller to reduce licensing fees. Fixed‐fee licensing is desirable for R&D firms in the absence of information asymmetry, but royalty licensing and a mixture of fees and royalties can work as a means to resolve information asymmetry. Using a dynamic model of signaling, this study shows that fixed‐fee licensing is adopted when the level of a new technology is large or small, while royalty licensing is adopted when the level is moderate.