Licensing of a new technology by an outside and uninformed licensor

Abstract

We examine the licensing decision of a non-producer innovator with a new technology that enables the manufacture of a saleable product. The technology is licensed and each user privately knows its innovation-related production cost, whereas the licensor only knows, with a certain probability, that this cost may be low (the user is efficient) or high (the user is inefficient). When a single licence is granted through separating contracts, only the contract intended for the inefficient user involves a per-unit royalty, but when two licences are granted through separating contracts, the contracts intended for the inefficient and efficient users both feature a per-unit royalty. However, screening is less likely as the number of licences increases, to the point that the licensor does not screen users when granting three licences. Additionally, whereas the diffusion of the innovation is socially insufficient under symmetric information, with asymmetric information it may be socially optimal. Finally, when licensing with contracts involving an ad-valorem royalty is also feasible the licensor finds it less attractive than licensing with a per-unit royalty.