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

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 1

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Keywords

Auctions
Innovation
Licensing
Mechanism design
Patents
R&D
Royalty

ASJC Scopus subject areas

Economics and Econometrics
Finance

Cite this

Fan, C., Jun, B. H., & Wolfstetter, E. G. (2013). Licensing process innovations when losers' messages determine royalty rates. Games and Economic Behavior, 82, 388-402. https://doi.org/10.1016/j.geb.2013.08.003

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Access to Document

10.1016/j.geb.2013.08.003