An Application of Nash Bargaining to Intellectual Property Negotiations

Abstract

In what follows we propose a solution to a hypothetical bargaining problem that is likely to arise when the owner of an invention, which is assumed to lower the marginal cost of production, negotiates a patent license with producers. We show that, under various assumptions about the downstream market structure, the solution that maximizes the Nash product in a specific market context need not require an even split of the available surplus. This conclusion about the equilibrium allocation of surplus is appropriate whether one adopts the original axiomatic treatment by Nash or the later dynamic non-cooperative bargaining model of Rubinstein and others. Initially, we describe the use of the Nash solution when there is a single patentee negotiating a license with a monopolist producer. We subsequently describe the more-recent Nash-in-Nash bargaining solution of Horn and Wolinsky, assuming there are two downstream rival producers with market power who independently negotiate a non-exclusive license with the patentee. Throughout, we pay particular attention to the complexities of defining disagreement payoffs, properly including attention to their credibility in the sense of Binmore.