Licensing process innovations when losers' messages determine royalty rates

Cuihong Fan, Byoung Heon Jun, Elmar G. Wolfstetter

Research output: Contribution to journalArticlepeer-review

9 Citations (Scopus)


We consider a licensing mechanism for process innovations that awards a limited number of unrestricted licenses to those firms that report the highest cost reductions, combined with royalty licenses to others. Firms' messages are dual signals of their cost reductions: the message of those who win an unrestricted license signals their cost reduction to rival firms, while losers' messages influence the royalty rate set by the innovator. We explain why a sufficiently high threshold level for awarding the unrestricted license is essential to induce truth-telling, show that the innovator generally benefits from the proposed mechanism, and derive conditions for implementability by a modified second-price auction.

Original languageEnglish
Pages (from-to)388-402
Number of pages15
JournalGames and Economic Behavior
Publication statusPublished - 2013 Nov


  • Auctions
  • Innovation
  • Licensing
  • Mechanism design
  • Patents
  • R&D
  • Royalty

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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