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Licensing of a New Product Innovation with Risk Averse Agents

Author

Listed:
  • Siyu Ma

    (China University of Political Science and Law)

  • Yair Tauman

    (Interdisciplinary Center (IDC), Herzliya
    Stony Brook University)

Abstract

An outside innovator invents a new product the viability of which is uncertain. The production technology is licensed to a number (strategic choice) of risk-averse potential Cournot producers by means of: an up-front fee, a per-unit royalty, an ad valorem royalty, or a two-part tariff. The incentive to innovate is maximized with a pure up-front fee if potential producers are (or are close to) risk neutral. Otherwise, it is maximized with a combination of up-front fee and ad valorem royalty. Any scheme that contains a royalty component (per-unit or ad valorem) maximizes the innovation diffusion. Irrespective of the magnitude of licensees’ risk aversion, the innovator and consumers are better off, but licensees are worse off with schemes that have an ad valorem royalty component than with a per-unit royalty component. Consumers are best off with pure up-front fee that avoids double marginalization, even though the innovator optimally sells only one license and creates a monopoly. The results remain similar for a risk-averse innovator, but change considerably with a producing innovator.

Suggested Citation

  • Siyu Ma & Yair Tauman, 2021. "Licensing of a New Product Innovation with Risk Averse Agents," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 59(1), pages 79-102, August.
    • Handle: RePEc:kap:revind:v:59:y:2021:i:1:d:10.1007_s11151-020-09797-5
    DOI: 10.1007/s11151-020-09797-5
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    References listed on IDEAS

    as
    1. 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.
    2. 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.
    3. Blair,Roger D. & Lafontaine,Francine, 2011. "The Economics of Franchising," Cambridge Books, Cambridge University Press, number 9780521775892, January.
    4. Stefano Colombo & Luigi Filippini, 2015. "Patent Licensing with Bertrand Competitors," Manchester School, University of Manchester, vol. 83(1), pages 1-16, January.
    5. 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.
    6. Bousquet, Alain & Cremer, Helmuth & Ivaldi, Marc & Wolkowicz, Michel, 1998. "Risk sharing in licensing," International Journal of Industrial Organization, Elsevier, vol. 16(5), pages 535-554, September.
    7. 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.
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    Cited by:

    1. Cheng‐Tai Wu & Tsung‐Sheng Tsai, 2024. "Patent licensing for signaling the cost‐reduction innovation: The case of the insider innovator," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 26(1), February.

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    More about this item

    Keywords

    Ad valorem royalty; Patent licensing; New product innovation;
    All these keywords.

    JEL classification:

    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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