Fixed-fee Licensing Research Articles

The optimal technology licensing strategy under supply disruption

We study the problem of whether and how a patent-holding firm (supplier S1) should license its technology patent to a potential rival (supplier S2). If the license is given, the two suppliers both produce a critical component for their downstream manufacturer simultaneously (sequentially) when the manufacturer adopts a dual (contingent) sourcing mode. However, both suppliers face risks of complete supply disruptions. In the study, we examine how the supply risk affects S1's technology licensing willingness and under which conditions royalty or fixed-fee licensing is its optimal strategy. The results show that when the manufacturer adopts contingent sourcing, S1 is always willing to license its technology to S2 and fixed-fee licensing is the optimal strategy. However, when dual sourcing is adopted, either royalty and fixed-fee licensing could be S1's optimal licensing strategy, depending on the reliability degree of the suppliers’ productions. Our findings extend the conclusion from previous researchers about royalty and fixed-fee licensing in a Cournot duopoly model.

‘To sell or not to sell’: Licensing versus selling by an outside innovator

We study various modes of technology transfer of an outside innovator in a spatial framework when the potential licensees are asymmetric. In addition to different licensing options, we also look into the option of selling the property rights of innovation and find the optimal mode of technology transfer. For licensing we find the optimal policy is to offer pure royalty contracts to both licensee firms when cost differentials between the firms are relatively small compared to the transportation cost, otherwise offer a fixed fee licensing contract to the efficient firm only. Interestingly, we show the innovator is always better-off selling the innovation to any one of the firms who further licenses it to the rival firm. The result holds irrespective of the size of the innovation (drastic or non-drastic) and the degree of cost asymmetry between the licensees. Social welfare is greater under selling than licensing.

Optimal licensing in a differentiated Bertrand market under uncertain R&D outcomes and technology spillover

This paper studies the licensing behavior in a differentiated Bertrand duopoly market in which the innovative firm engages in a cost-reducing R&D with uncertain outcomes. We also assume that there will be technology spillover if R&D ends in success. The results show that, in the case of a non-drastic innovation with uncertain outcomes, (i) the optimal licensing contract in terms of fixed-fee and royalty licensing is fixed-fee licensing when product substitution and technology spillover are both small, while it is royalty licensing otherwise; and (ii) if two-part tariff licensing is available, it is superior (equivalent) to royalty licensing when technology spillover is small (large), but always better than fixed-fee licensing for any degree of product substitution and technology spillover. Moreover, the results also indicate that the probability of R&D success in each licensing method plays an important role in determining the innovative firm's optimal licensing strategy.

Eco-technology licensing by a foreign innovator and privatization policy in a polluting mixed duopoly

This article investigates the fixed-fee licensing contract in a mixed duopoly where public and private firms may purchase eco-technology from a foreign innovator. We show that the foreign innovator chooses either an exclusive or a non-exclusive licensing contract, depending on (i) the cost gap between the two firms, (ii) the environmental damage caused by pollutants, and (iii) whether a public firm is privatized or not. We further examine the welfare consequences of non-exclusive licensing, exclusive licensing and discriminatory fixed-fee licensing contracts, respectively, and show that privatization improves social welfare when both cost gap and environmental damage are large.

Cooperation strategy of technology licensing based on evolutionary game

This study analyzes the issue of technology-licensing cooperation between a firm with production patent technology and a firm with inferior production technology, and obtains the evolution trend of the technology-licensing deal and cooperation strategy under fixed-fee licensing and royalty licensing situation. We find that the probability of successful cooperation between the two firms increases when fixed technology-license fees and cost savings from technology licensing increase simultaneously, and change of fixed technology license fees and cost savings affects the willingness to cooperate of the firm with inferior production technology, and not the firm with production patent technology. Furthermore, modest royalty fees promote successful cooperation. In both licensing situations, for the firm with production patent technology, an increase in the market share of its products or non-licensing resource sharing cost-saving value reduces the cooperation probability. Meanwhile, for the firm with inferior production technology, an increase in the market share of its products promotes successful cooperation in the royalty licensing case, but requires conditions for fixed technology-licensing fees and cost savings lower than a certain value in the fixed-fee licensing case.

License and Entry Strategies for an Outside Innovator Under Duopoly

In Proposition 4 of Kamien and Tauman (Q J Econ 101:471–492, 1986), assuming linear demand and cost functions with fixed fee licensing it was argued that for the outside innovating firm under oligopoly when the number of firms is small (or very large), strategy to enter the market with license of its cost-reducing technology to the incumbent firm (entry with license strategy) is more profitable than strategy to license its technology to the incumbent firm without entering the market (license without entry strategy). However, their result depends on their definition of license fee, and it is inappropriate if the innovating firm can enter the market. If we adopt an alternative more appropriate definition based on the threat by entry of the innovating firm, license without entry strategy is more profitable in the case of linear demand and cost functions. Also we investigate the problem in the case of quadratic cost functions in which entry with license strategy may be optimal. Further we will show that the optimal strategies for the innovating firm when license fees are determined under the assumption that the licensor takes all benefit of new technology and its optimal strategies when license fees are determined according to Nash bargaining solution are the same.

Patent licensing under financial structure with limited liability

In a seminal paper, Kamien and Tauman (1986) show that fixedfee licensing is always superior to royalty licensing for the outsider licensor under Cournot competition. However, empirical studies demonstrate that royalty licensing is much more popular than fixed-fee licensing. We attempt to reconcile this controversy by taking into account the financial structure of firms with limited liability. We show that the optimal licensing contract under Cournot competition is royalty licensing if the mean-preserving variance of demand is large, while it is non-exclusive fixed-fee licensing otherwise. Moreover, this result is robust under mixed licensing contract and an oligopolistic market.

Quantity and collection decisions in a closed-loop supply chain with technology licensing

Industry practice has shown that technology licensing has an important effect on the remanufacturing of patented products by third parties. Different licensing methods significantly impact a supply chain member's production and collection decisions, and they also have influential effects on reverse channel performance. However, there is scant literature investigating the decision on technology licensing and its impact on a supply chain member's production and collection decisions. To address this gap, we consider a manufacturer, as the patent holder, who produces new and remanufactured products and, simultaneously, he and a remanufacturer (as the licensee, who by law can only produce remanufactured products) competitively collects used products from the market in a two-period closed-loop supply chain (CLSC). We investigate two licensing patterns, fixed fee versus royalty, within the CLSC in a Cournot duopoly model. We find that royalty licensing is dominated by fixed fee licensing from the viewpoints of both the consumer surplus and environmental protection. Our result also shows that the manufacturer's optimal licensing strategy is determined by a threshold of the fixed fee: when the fixed fee is below a threshold, it is better for the manufacturer to use a royalty licensing, whereas fixed-fee licensing should be used when the fixed fee is higher than a threshold.

Optimal licensing of uncertain patents in a differentiated Stackelberg duopolistic competition market

This study investigates the strategy implications of patent licensing between two firms in a differentiated Stackelberg framework, when the innovator faces an uncertain research and development (R&D) outcome. We establish a three-stage duopoly game (with an R&D stage, a licensing stage and an output stage), in order to analyze the effects of product differentiation and technology spillover on the optimal licensing strategy for a stochastic R&D firm. Our results demonstrate that, in cases where the R&D outcome is uncertain, (i) whether the innovator chooses fixed-fee licensing or royalty licensing depends on the degree of product differentiation and technology spillover; (ii) when the technology spillover is lower than a critical value, regardless of the degree of product differentiation, two-part tariff licensing is superior to fixed-fee licensing and royalty licensing, and (iii) the optimal royalty rate is dependent upon the technology spillover, with the value possibly being higher than the cost reduction.

Optimal Licensing Policy under Vertical Product Differentiation

AbstractThis paper explores a vertical product differentiation model with a licensing arrangement between a multinational firm with superior technology and a domestic firm with obsolete technology. We find that a subsidy provided by the domestic country's government to the domestic firm to assist with the licensing arrangement is welfare enhancing for the domestic country. Furthermore, both the multinational firm and the domestic country are better off under royalty than under fixed fee licensing. These findings stand in contrast to earlier results in the literature.

Patent Licensing in the Presence of Trade Barriers

We develop a two-country duopoly model to explore the optimal licensing contract for an outsider licensor in terms of fixed-fee and royalty licensing by taking into account trade barriers when firms produce a homogeneous product and engage in Bertrand competition in each market. The present paper focuses on the interaction between licensing and trade barriers in two international markets. We show that both royalty and non-exclusive fixed-fee licensing can be optimal. Furthermore, exclusive fixed-fee licensing can be optimal, which is a result that is not discussed in the existing literature.

Indirect Taxes in Oligopoly in Presence of Licensing Opportunities

This paper considers the relative efficiency of unit tax and ad valorem tax in a Cournot duopoly market in the presence of licensing opportunities after the announcement of the tax rates by the government. In case of fixed-fee licensing, if the unit cost difference of the firms is low and tax revenue of the government is high, then unit tax is more efficient than the ad valorem tax. If tax revenue of the government is low, then ad valorem tax is more efficient than unit tax. Ad valorem tax is more efficient than unit tax in the case of royalty licensing.

Licensing strategy for a stochastic R&D firm in a differentiated Cournot duopoly model

This paper investigates an innovating firm’s licensing strategy in a differentiated Cournot duopoly model when the firm is an insider and the R&D outcome is stochastic. We develop a duopoly game model in which the innovating firm has three options for licensing its innovation: fixed-fee licensing, royalty licensing and two-part tariff licensing. We consider three stages in the model: the R&D, licensing and output stages. We find that product differentiation and technology spillover play significant roles in the innovating firm’s choice between fixed-fee and royalty licensing. In addition, regardless of the degree of product differentiation, we find that (1) two-part tariff licensing is superior to both fixed-fee and royalty licensing when technology spillover is low and that (2) two-part tariff licensing is equivalent to royalty licensing when technology spillover is high.DOI: http://dx.doi.org/10.5755/j01.ee.26.5.12313

A Macroeconomic Model of Imperfect Competition with Patent Licensing

Abstract This paper sets up an imperfectly competitive macroeconomic model that features the strategic interaction between the patent-holding firm and licensees, and uses it to analyze the relevant macro-variables under various licensing arrangements. Some main findings emerge from the analysis. First, the equilibrium aggregate output and aggregate consumption under fixed-fee and royalty licensing regimes are always greater than those under the no licensing regime. Moreover, the equilibrium aggregate output and consumption under the fixed-fee licensing regime are always greater than those under the royalty licensing regime. Second, with the higher (lower) technology level the patent holder prefers the fixed-fee (royalty) contract. Third, welfare could be improved through technology transfer, and the level of welfare under the fixed-fee licensing regime is higher than that under the royalty licensing regime. Lastly, this paper discusses some extensions of the baseline model.

Fixed fee licensing for cost-reducing technologies: Should innovators reveal their private information?

In the process of licensing their technology to downstream firms, innovators often get some information on the firms’ cost reductions. Revealing this information to the market influences the market game, and thereby the licensees’ willingness to pay. We analyze the innovator’s optimal information provision with fixed fee licensing. Our main result is that the innovator should reveal the number of licenses, but should keep silent on the cost reductions of licensees. The intuition is that the innovator’s profit depends only on the willingness to pay of the critical firm which only just buys a license, and this firm benefits if the number of firms is revealed, but nothing is learned on the actual cost distribution.

Technology Transfer in Oligopoly in Presence of Fixed-Cost in Production

This paper discusses different possibilities of licensing between Cournot duopolists with a technology characterized by constant marginal cost and positive fixed-cost. It is shown that optimal fixed-fee and per-unit royalty can be negative. This implies that the licensor can subsidize the licensee in the equilibrium to license its technology even if they compete in the output market in the post-licensing stage. Moreover superiority of up-front fee as an advance on royalties is also identified. The firm having lower marginal cost and higher fixed cost prefers royalty licensing than licensing by fixed-fee, while the other firm having lower fixed cost and higher marginal cost sometimes prefers fixed-fee licensing. Interestingly, a firm that earns less profit in the no-licensing stage may become the licensor of its technology.

Technology Licensing Strategy for Network Product in a Service Industry

Technology licensing has gained significant attention in literature and practice as a rapid and effective way to improve firm’s capability of technology innovation. In this paper, we investigate a duopolistic service provider competition market, where service providers develop and sell a kind of network product. In this setting, we analyze the innovating service provider’s four licensing strategies: no licensing, fixed fee licensing, royalty licensing, and two-part tariff licensing. The literature suggests that when the network products can be completely substituted, two-part tariff licensing is the optimal strategy of the innovating service provider. We find that when the network products cannot be completely substituted, two-part tariff licensing is not always optimal. The degree of the product differentiation, the intensity of the network effects, and the R&D cost of the potential licensee play a key role in determining the innovating service provider’s optimal licensing strategies.

Technology Licensing and Shareholding in Vertically-Related Markets

This paper explores the optimal licensing contract, in which the manufacture firm holds the equity of the retail firm and licenses the cost-reducing innovation to the vertically integrated firm. The objective of this paper is to investigate the effect of the retail firm’s equity on the manufacture firm’s licensing decisions. The paper shows that the manufacture firm prefers royalty (fixed-fee) licensing when the manufacture firm holds large (small) equity of the retail firm.

Does two-part tariff licensing agreement enhance both welfare and profit?

It is general belief that firm profit is higher under two-part tariff licensing, while social welfare is greater under fixed-fee licensing. We show that this conclusion need not hold when technology transfer is costly and, in particular, when the quality of licensed technology is endogenously chosen. We demonstrate that both social welfare and firms profit are higher under two-part tariff licensing than they are under fixed-fee licensing. We also show that a higher quality of technology is licensed under the two-part tariff scheme than it is under the fixed-fee licensing contract. Our analysis suggests that both firms and society may prefer two-part tariff licensing contract under costly technology transfer. This study presents direct contrast result and contributes, therefore, to the extant literature wherein the transfer of technology is costless.

Technology licensing in mixed oligopoly

We develop a mixed oligopoly model with one public firm and two private firms to explore the licensing strategy considered by the innovated private firm. The major findings of our paper are that: firstly, if the patentee licenses the public firm under some plausible parametric range, the public firm will not accept the technology licensing offer from the private firm; secondly, if the public firm accepts the licensing, all of the three different types of licensing contracts (royalty, fixed-fee and two-part tariff) can be the same optimal licensing contracts; thirdly, if the patentee licenses to another private firm, fixed-fee licensing will be the optimal choice for the patentee; finally, licensing to the public firm and another private firm simultaneously is not the best strategy for the patentee when the original cost difference between public and private firms is large. Our results are quite different from the previous on the licensing strategy among private firms.