Licensing a common value innovation when signaling strength may backfire

Cuihong Fan; Byoung Heon Jun; Elmar G. Wolfstetter

doi:10.1007/s00182-013-0391-9

Licensing a common value innovation when signaling strength may backfire

Cuihong Fan, Byoung Heon Jun, Elmar G. Wolfstetter

Department of Economics

Research output: Contribution to journal › Article › peer-review

6 Citations (Scopus)

Abstract

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 language	English
Pages (from-to)	215-244
Number of pages	30
Journal	International Journal of Game Theory
Volume	43
Issue number	1
DOIs	https://doi.org/10.1007/s00182-013-0391-9
Publication status	Published - 2014 Feb

Keywords

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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10.1007/s00182-013-0391-9

Cite this

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title = "Licensing a common value innovation when signaling strength may backfire",

abstract = "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.",

keywords = "Auctions, Innovation, Licensing, Mechanism design, Patents",

author = "Cuihong Fan and Jun, {Byoung Heon} and Wolfstetter, {Elmar G.}",

note = "Funding Information: We would like to thank Jinwoo Kim, Jae Nahm, Kiho Yoon, two anonymous referees, the Associate Editor, and the Co-Editor Vijay Krishna for comments. Research support by the National Research Foundation of Korea funded by the Korean Government (NRF-2010-330-B00085), the Deutsche Forschungsgemeinschaft (DFG), SFB Transregio 15, “Governance and Efficiency of Economic Systems,” the Humanities and Social Sciences Research Foundation of Chinese Ministry of Education (Grant 09YJA790133), and the “Innovation Program of Shanghai Municipal Education Commission” (Grant 12ZS076) is gratefully acknowledged. ",

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doi = "10.1007/s00182-013-0391-9",

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AU - Wolfstetter, Elmar G.

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KW - Licensing

KW - Mechanism design

KW - Patents

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Licensing a common value innovation when signaling strength may backfire

Abstract

Keywords

ASJC Scopus subject areas

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