Optimal Licensing Contract: The Implications of Preference Function

Abstract

Our analysis provides a rationale for the existence of a positive fixed-fee and output royalty in the licensing contracts. In this article, we show that the preference functions play an important role in this respect. As the market expansion effect gets weaker, it reduces the possibility of a royalty-only contract, thus increasing the possibility of the co-existence of a positive fixed-fee and output royalty in the licensing contract. Our argument is different from the existing reasons based on imitation, number of firms, product differentiation and decreasing returns to scale. JEL: D21, D43, L13