Licensing process innovations when losers' messages determine royalty rates

Cuihong Fan; Byoung Heon Jun; Elmar G. Wolfstetter

doi:10.1016/j.geb.2013.08.003

Licensing process innovations when losers' messages determine royalty rates

Cuihong Fan, Byoung Heon Jun, Elmar G. Wolfstetter

Department of Economics

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

8 Citations (Scopus)

Abstract

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 language	English
Pages (from-to)	388-402
Number of pages	15
Journal	Games and Economic Behavior
Volume	82
DOIs	https://doi.org/10.1016/j.geb.2013.08.003
Publication status	Published - 2013 Nov

Keywords

Auctions
Innovation
Licensing
Mechanism design
Patents
R&D
Royalty

ASJC Scopus subject areas

Finance
Economics and Econometrics

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title = "Licensing process innovations when losers' messages determine royalty rates",

abstract = "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.",

keywords = "Auctions, Innovation, Licensing, Mechanism design, Patents, R&D, Royalty",

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

note = "Funding Information: Financial support was received from the Humanities and Social Sciences Research Foundation of the Ministry of Education of China (Grant 09YJA790133 ) and the “ Innovation Program of Shanghai Municipal Education Commission ” (Grant 12ZS076 ), the National Research Foundation of Korea funded by the Korean Government ( NRF-2010-330-B00085 ), and the Deutsche Forschungsgemeinschaft (DFG) , SFB Transregio 15, “Governance and Efficiency of Economic Systems.” Detailed comments by the Advisory Editor and the anonymous referees and discussions with Michael Peters and David Salant are gratefully acknowledged. ",

year = "2013",

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doi = "10.1016/j.geb.2013.08.003",

language = "English",

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pages = "388--402",

journal = "Games and Economic Behavior",

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AU - Jun, Byoung Heon

AU - Wolfstetter, Elmar G.

N1 - Funding Information: Financial support was received from the Humanities and Social Sciences Research Foundation of the Ministry of Education of China (Grant 09YJA790133 ) and the “ Innovation Program of Shanghai Municipal Education Commission ” (Grant 12ZS076 ), the National Research Foundation of Korea funded by the Korean Government ( NRF-2010-330-B00085 ), and the Deutsche Forschungsgemeinschaft (DFG) , SFB Transregio 15, “Governance and Efficiency of Economic Systems.” Detailed comments by the Advisory Editor and the anonymous referees and discussions with Michael Peters and David Salant are gratefully acknowledged.

PY - 2013/11

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N2 - 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.

AB - 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.

KW - Auctions

KW - Innovation

KW - Licensing

KW - Mechanism design

KW - Patents

KW - R&D

KW - Royalty

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EP - 402

JO - Games and Economic Behavior

JF - Games and Economic Behavior

SN - 0899-8256

ER -

Licensing process innovations when losers' messages determine royalty rates

Abstract

Keywords

ASJC Scopus subject areas

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