Optimal patent licensing—Two or three‐part tariff

Abstract

AbstractWe look into technology transfer by an insider patentee in a spatial duopoly model under three types of licensing contracts—(i) two‐part tariff with fixed fee and per‐unit royalty, (ii) two‐part tariff with fixed fee and ad‐valorem royalty and (iii) general three‐part tariff with fixed fee, per‐unit and ad‐valorem royalties. Under two‐part tariff contracts, the licenser is better off with the per‐unit royalty contract but the general contract does better than the other contracts. In contrast to the existing literature, all three licensing contracts may make the consumers worse‐off compared to no licensing, with the lowest consumer surplus achieved under the general licensing contract. Welfare under the general licensing contract is equal to the welfare under two‐part tariff with ad‐valorem royalty and it is higher than the welfare under no licensing but lower than the welfare under two‐part tariff with per‐unit royalty. Hence, the general three‐part licensing contract is privately optimal but not socially optimal. Similar conclusions hold also under a nonspatial linear demand model with differentiated products.