Monday, November 20, 2017

Per Unit vs. Ad Valorem Royalty Licensing

Cuihong Fan (Shanghai University of Finance and Economics) ; Byoung Heon Jun (Department of Economics, Korea University, Seoul, Republic of Korea) ; Elmar G. Wolfstetter (Department of Economics, Korea University, Seoul, Republic of Korea) analyze Per Unit vs. Ad Valorem Royalty Licensing.

ABSTRACT: We consider the licensing of a non-drastic innovation by an innovator who interacts with a potential licensee in a downstream Cournot market. We compare two kinds of license contracts: per unit and ad valorem, combined with fixed fees. Assuming that antitrust authorities apply the same principle to review ad valorem royalty license contracts which they apply to per unit royalty license contracts, we show that per unit royalty licensing is more profitable if the licensor is more efficient in using the innovation, whereas ad valorem royalty licensing is more profitable if the licensee is more efficient. This explains why and when these licensing schemes should be observed.

https://lawprofessors.typepad.com/antitrustprof_blog/2017/11/per-unit-vs-ad-valorem-royalty-licensing.html

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