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Patent licensing under financial structure with limited liability

Author

Listed:
  • Wang, Kuang-Cheng Andy
  • Wang, Yi-Jie
  • Liang, Wen-Jung
  • Tsai, Ming-Che
  • Mai, Chao-Cheng

Abstract

In a seminal paper, Kamien and Tauman (1986) show that fixedfee licensing is always superior to royalty licensing for the outsider licensor under Cournot competition. However, empirical studies demonstrate that royalty licensing is much more popular than fixed-fee licensing. We attempt to reconcile this controversy by taking into account the financial structure of firms with limited liability. We show that the optimal licensing contract under Cournot competition is royalty licensing if the mean-preserving variance of demand is large, while it is non-exclusive fixed-fee licensing otherwise. Moreover, this result is robust under mixed licensing contract and an oligopolistic market.

Suggested Citation

  • Wang, Kuang-Cheng Andy & Wang, Yi-Jie & Liang, Wen-Jung & Tsai, Ming-Che & Mai, Chao-Cheng, 2016. "Patent licensing under financial structure with limited liability," International Review of Economics & Finance, Elsevier, vol. 46(C), pages 121-135.
  • Handle: RePEc:eee:reveco:v:46:y:2016:i:c:p:121-135
    DOI: 10.1016/j.iref.2016.09.001
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    References listed on IDEAS

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    1. Sougata Poddar & Uday Bhanu Sinha, 2004. "On Patent Licensing in Spatial Competition," The Economic Record, The Economic Society of Australia, vol. 80(249), pages 208-218, June.
    2. 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.
    3. Kuang-Cheng Andy Wang & Ching-Chih Tseng & Wen-Jung Liang, 2016. "Patent Licensing in the Presence of Trade Barriers," The Japanese Economic Review, Springer, vol. 67(3), pages 329-347, September.
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    Cited by:

    1. Lin, Yen-Ju, 2022. "Consumer welfare, licensing, and exclusive dealing with vertically- and horizontally-differentiated products," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 147-158.

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    More about this item

    Keywords

    Leveraged firms; Limited liability; Outsider patentee; Cournot competition; Licensing means;
    All these keywords.

    JEL classification:

    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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