Per-Unit Royalty vs Fixed Fee: The Case of Weak Patents

Posted by D. Daniel Sokol

Rabah Amir (University of Arizona - University of Arizona), David Encaoua (CES - Sorbonne, Paris School of Economics - Ecole d'Economie de Paris) and Yassine Lefouili (GREMAQ, Toulouse I) explore Per-Unit Royalty vs Fixed Fee: The Case of Weak Patents.

ABSTRACT: This paper explores a licensor's choice between charging a per-unit royalty or a …fixed fee when her innovation is covered by a weak patent, i.e. a patent that is likely to be invali- dated by a court if challenged. Using a general model where the nature of competition is not speci…ed, we show that the patent holder prefers to use a per-unit royalty scheme if the strategic e¤ect of an increase in a potential licensee's unit cost on the aggregate equilibrium pro…t is positive. To show the mildness of the latter condition, we establish that it holds in a Cournot (resp. Bertrand) oligopoly with homegenous (resp. heterogenous) products under very general assumptions on the demands faced by …firms. As a byproduct of our analysis, we contribute to the oligopoly literature by offering some new insights of independent interest regarding the effects of cost variations on Cournot and Bertrand equilibria.