Licensing a common value innovation when signaling strength may backfire

Cuihong Fan, Byoung Heon Jun, Elmar G. Wolfstetter

Research output: Contribution to journalArticlepeer-review

6 Citations (Scopus)


This paper reconsiders the licensing of a common value innovation to a downstream duopoly, assuming firms observe imperfect signals of the cost reduction induced by the innovation. The innovator adopts a direct revelation mechanism and awards an unrestricted license to the firm that reports the highest signal and a royalty contract to the other. Firms may signal strength to their rivals through exaggerated messages, which may however backfire, and give rise to higher royalty payments. We provide sufficient conditions for truthful implementation, and for the profitability of adding royalty contracts to what is otherwise a first-price license auction.

Original languageEnglish
Pages (from-to)215-244
Number of pages30
JournalInternational Journal of Game Theory
Issue number1
Publication statusPublished - 2014 Feb


  • Auctions
  • Innovation
  • Licensing
  • Mechanism design
  • Patents

ASJC Scopus subject areas

  • Statistics and Probability
  • Mathematics (miscellaneous)
  • Social Sciences (miscellaneous)
  • Economics and Econometrics
  • Statistics, Probability and Uncertainty


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