Licensing a quality-enhancing innovation to an upstream firm

This paper examines the case where a patent holder who is not a producer licenses its quality-enhancing innovation to an upstream firm, which sells its product through a downstream monopoly. It is found that the patent holder prefers a two-part tariff contract, which includes both a fixed-fee and per-unit output royalty. However, the royalty included in the licensing contract makes each firm price at a markup over marginal cost and therefore makes both consumers and the society worse off, if the innovation is small and the supplier is weak. From a welfare perspective, licensing by means of an ad valorem tax is more efficient, as it allows the upstream firm to be less aggressive when trading with the downstream firm.     

Contracts payments for ecosystem services: the case of bio-pospecting

We examine the economics of royalties in bioprospecting contracts between a pharmaceutical and genetic resource supplier (local), with an eye to understanding the relative advantages of indexing royalty payments to gross revenue or net revenue. We show a risk-averse firm facing only production or only cost risks will index royalties to net revenue. When facing both types of risk, the choice of royalty type depends on the relative magnitudes of the production and cost risk. In each case, the risk-averse firm chooses the royalty type that shifts as much risk as possible to the local. When the local is risk neutral, the pharmaceutical's and local's preferences are compatible. If the local is risk averse and there is only one type of risk, it will prefer a gross revenue royalty, and shift as much risk as possible to the firm: here the local and firm preferences are compatible only if the firm is risk-neutral, Lastly, we show if the firm sets the terms of the contract, and both agents are risk averse, the firm will not likely volunteer to implement the socially optimal royalty arrangement as it prefers to shift as much risk to the local, who now also prefers a more certain return. This last outcome is at the heart of the benefit sharing discussion and suggests if risk sharing and equity are a concern in benefit sharing, then the choice of royalty type can be an important part of negotiations between pharmaceuticals and locals for the phytochemical from nature for new drug discovery.     

专利权人在不对称信息下的技术授权策略选择

过去的研究显示,在专利权人不参与市场生产的情况下,定额权利金的收益将优于单位权利金的收益。本文得出,当被授权厂商存在成本上的私人信息时,专利权人最优的授权策略,有可能变成采用单位权利金的授权方式或定额加单位权利金的混合式授权方式。     

Technology licensing or cost-reducing outsourcing? Game theoretical analysis on consumers' home bias effects and firms' optimal strategies

International cost-reducing outsourcing lowers consumers' perceived quality of products due to home bias. This paper envisages a vertically differentiated Cournot duopoly associated with international, cost-reducing outsourcing and non-outsourcing schemes in both licensing and non-licensing cases. It examines the impacts of home bias effect on the behaviour of firms and welfare. It shows that the optimal strategy of the patent holder varies from situation to situation associated with the home bias effect. In equilibrium, the dominant strategy for the patent holder is licencing and no outsourcing. If a licensee will outsource its inputs after upgrading the quality of its products, then the patent holder will earn higher profits than one in a case where the licensee does not outsource. If both the patent holder and the licensee produce without outsourcing, a welfare-reducing licensing occurs. On the other hand, if the licensee outsources its production inputs but the patent holder does not outsource, then a welfare-improving licensing generates a win-win situation for the patent holder and for society. Furthermore, the smaller the quality gap between two goods prior to implementing licensing, the lower the royalty rate imposed by the patent holder.     

Licensing to a durable-good monopoly

This paper incorporates a durable-good monopoly model and re-examines the argument on licensing contracts. It shows that, from the perspective of the non-producing patent holder, the optimal licensing contract depends on the nature and the degree of the innovations. Specifically, for small cost-reducing or quality-improving innovations, charging a royalty is optimal. For large cost-reducing or quality-improving innovations, licensing by means of a fee and a royalty is superior to using either alone. However, for the case of horizontal product innovations, using a fee contract is optimal.     

R&D INVESTMENTS AND SEQUENTIAL WAGE NEGOTIATIONS*

This paper analyses how the structure of wage bargaining affects R&D investment by firms that increases the productivity of labour in a Cournot duopoly. We find that total expenditure on R&D is greater when wages are set simultaneously than when they are set sequentially. Thus sequential wage negotiations reduce the incentive for firms to innovate and affect the productivity of labour. When wage negotiations are sequential the productivity of labour is greater (lower) in the follower (leader) firm than when negotiations are simultaneous. We also obtain that for same parameter values it is possible for the firm with the lower productivity to end up paying a higher wage than the firm with the higher level of labour productivity.     

FEE VERSUS ROYALTY POLICY IN LICENSING THROUGH BARGAINING: AN APPLICATION OF THE NASH BARGAINING SOLUTION

In this paper, we consider a Cournot duopoly market in which the patent‐holding firm negotiates with its rival firm about payments for licensing a cost‐reducing innovation. Applying the Nash bargaining solution, we compare two licensing policies, a fixed fee and a royalty. Our results are as follows. Royalty licensing is better than fixed fee licensing for both firms if the innovation is not drastic. So, royalty licensing is always carried out. Moreover, though there exists a case in which consumers prefer fixed fee licensing, royalty licensing is always superior to fixed fee licensing from the social point of view.     

The Influence of a Neighbouring Market on Product Qualities and Prices

This paper analyses a model of vertical product differentiation in which there is a primary market with two firms and a secondary market with no firms. Consumers in the secondary market incur a cost when purchasing the product from the primary market. The firms sequentially choose product quality and then simultaneously choose prices. Firm 1 always chooses the maximum quality, while firm 2's quality and the prices depend on the cost. Also, the cost determines which firm(s), if either, serves the secondary market. It is shown that the firms and the consumers of each market prefer different levels of costs.     

Fair,reasonable, and non-discriminatory terms and technology adoption: standard setting vs. incompatible technologies

The present paper shows that in the absence of fair, reasonable, and non-discriminatory (FRAND) licensing terms, the adoption of a standard depends on the degree of network effects. If the degree of network externalities is low, patent holders may opt for developing incompatible technologies in order to avoid the entry deterrence in the downstream market and the resulting decrease in the royalty income. If the degree of network externalities is sufficiently high, patent holders may prefer developing a common standard even though it has a negative impact on the market entry in the downstream market. Generated network externalities are then sufficiently high to create additional demand compensating the losses from the entry deterrence. The application of FRAND terms eliminates the entry deterrence problem and by consequence stimulates the standard adoption. The use of the FRAND commitment has beneficial effects for consumer surplus and total welfare.     

A great wall of patents: What is behind China's recent patent explosion?

China's patent surge, documented in this paper, is seemingly paradoxical given the country's weak record of protecting intellectual property rights. Using a firm-level data set that spans the population of China's large and medium-size industrial enterprises, this paper explores the factors that account for China's rising patent activity. While the intensification of research and development in the Chinese economy tracks with patenting activity, it explains only a fraction of the patent explosion. The growth of foreign direct investment in China is prompting Chinese firms to file for more patent applications. Amendments to the patent law that favor patent holders and ownership reform that has clarified the assignment of property rights also emerge as significant sources of China's patent boom. These results are robust to alternative estimation strategies that account for over-dispersion in the patent counts data and firm heterogeneity.     

Timing of endogenous bargaining over costs and firms’ locations

This work analyzes a duopoly in which firms choose their locations and then bargain over wages with their unions. The timing of the bargaining process is endogeously determined. We obtain that bargaining is simultaneous if and only if both firms decide when negotiations take place. Otherwise negotiation takes place sequentially. Under simultaneous or sequential negotiations, the market is equally shared and both firms have the same price-cost margins and profits. When bargaining is sequential firms have higher profits, the leader locates closer to the market than in the simultaneous case, the follower locates further away and the distance between the two firms is greater.      

Trade-Related Intellectual Property Rights, North-South Trade, and Biological Diversity

In the Trade-Related Intellectual Property Rights (TRIPS) Agreement of GATT (1 January 1995) it was agreed to harmonise intellectual property rights (IPR) on an international level and to include the option for patent protection for all life forms such as plants and animals (Article 27 (3) b). Patenting, however, leads to considerable conflicts between international trade and protection of biological diversity, which can be illustrated by the example of seed production. We make use of a three-stage game to show the strategic incentives for implementation of two different property rights regimes (patents and farmers' rights) on competition and biodiversity. We show that the Southern government has no incentive to acknowledge international patents, even if farmers' rights do exist. The Northern producer will always dominate in the output market if patents are applied, but without farmers' rights biodiversity will not be maintained by the Southern government. Thus total payoff of the northern firm is maximized, if both IPR regimes are implemented. However, if only farmers' rights are valid, biodiversity will be maximal.     

THE MULTIPRODUCT DEPOSITORY FIRM, INTEREST-BEARING TRANSACTION BALANCES, INTEREST-BEARING RESERVES, AND UNCERTAINTY

In this paper a model of depository firm behavior is developed in which the depository institution acts as a multiple product producer. The multi-product model is an application of the general theory of value to the particular case of depository firms. It generalizes the theory of bank behavior to include production and cost aspects of banking activity as well as its financial aspects and reconciles the rivaling intermediary and firm-theoretic views on depository institutions. By so doing, it bridges the gap between models which treat depository firms as mere portfolio holders and those which analyze the check clearance function in isolation. Risk aversion, production function constraint, jointness, and multiple sources of uncertainty are simultaneously introduced. The model is used to analyze the effects of interest payment on transaction balances, interest payment on reserves of depository institutions by the Central bank, and the Central bank policy swings.     

On contract duration of royalty licensing contracts

This paper explores how the choice of royalties and contract duration can be a device to mitigate opportunistic behavior in the presence of asymmetric information. It presents a model where an upstream patent holder with no production capabilities licenses a product innovation, by means of royalty-only contracts, to several downstream firms that produce and market the new product. In a two-period signaling model, the profitability of short-term and long-term contracts is compared, given that the licensees’ costs may be inferred by observation of their output levels. For a sufficiently large difference in production costs, the patentee introduces a series of short-term contracts, rather than a long-term contract for the entire expected lifetime of the innovation. In such a sequence of contracts, both high- and low-cost firms pay the same royalty rate (which is not higher than that of long-term contracts) and reveal their costs in the first licensing period. Thereafter, royalties are smaller (than in the first period) for high-cost firms but larger for low-cost producers so as to increase expected total output and licensing income. Overall, royalties are not time-decreasing, in expected terms, as information evolves from incomplete to complete. This strategy is typically welfare-improving.     

垄断性资源定价、竞合博弈与序贯决策——以铁矿为例

文章依据铁矿石价格谈判的背景和原则,构建了供应链上游资源垄断者和下游两生产企业之间竞争及竞合的两个博弈定价模型。研究表明,供应链上游资源垄断者主要依据下游生产企业的利润水平确定其资源定价,影响下游议价能力的根本因素是其产量而非谈判技巧,竞合策略下价格谈判的先行者将获得更大的产量和利润优势。算例仿真结果则显示,与竞争策略相比,合作谈判策略能有效提高供应链下游生产企业的议价能力,降低上游垄断者的资源定价能力,有效缩减整体谈判成本。     

Environmental Taxes and First-Mover Advantages

This paper studies whether governments prefer to be leaders or followers in environmental policies. To analyze this question I assume transboundary pollution and two countries that have to decide whether to set environmental taxes sequentially or simultaneously. When taxes are set sequentially an effect, denoted as the sequential setting effect, arises that raises the equilibrium taxes. I show that whether governments prefer to be leaders or followers in taxes depends on the degree to which environmental pollution spills over to trading partners. When this overspill is low enough, taxes are strategic complements and both the leader and the follower obtain greater welfare than under a simultaneous tax setting. However, the leader country obtains greater welfare than the follower. In this case, governments set taxes sequentially. When the degree to which environmental pollution spills over to trading partners is high enough, taxes are strategic substitutes and governments set taxes simultaneously. In this case, each government wants to avoid becoming the follower in taxes.     

Licensing policies for a new product

This paper studies licensing policies for the owner of a new product and addresses their welfare impact in the assessment of market failures. We show that the best licensing policy for the patent holder is fixed fee licensing with an exclusive territory clause. Consumers are also better off with fixed fees but do not prefer the exclusive territory clause. Social welfare is higher under exclusive territories when fixed costs are not too large. As for efficiency, the number of licences in the private market equilibrium falls short of the socially optimal solution. Our analysis discloses that (i) any policy measures aimed at enhancing the diffusion of technology, in terms of the number of licences, would be welcomed and, (ii) the permissive treatment received by licensing agreements with exclusive territories is justified.     

ENDOGENOUS TIMING IN A MIXED DUOPOLY: WEIGHTED WELFARE AND PRICE COMPETITION*

In this paper we analyse the endogenous order of moves in a mixed duopoly for differentiated goods. Firms choose whether to set prices sequentially or simultaneously. The private firm maximises profits while the public firm maximises the weighted sum of the consumer and producer surpluses (weighted welfare). It is shown that the result obtained in equilibrium depends crucially on the weight given to the consumer surplus in weighted welfare and on the degree to which goods are substitutes or complements. We also analyse whether the equilibria obtained maximise the sum of the consumer and producer surpluses or not. Finally we study whether the nationality of the private firm influences the results.     

Quality differentiation and product innovation licensing

Evidence reveals that there are more than 50% product innovation licensings applied within industries. We study product innovation licensing (quality-enhancing licensing) in both exclusive and non-exclusive schemes each under unit/revenue royalty and fixed fee in a vertically differentiated Cournot oligopoly, where a quality-leading firm is an internal licensor. We show that, under a non-exclusive licensing, royalty licensing is the superior policy for the licensor if quality difference within firms is small, regardless of whether a unit or revenue royalty scheme is offered. Under an exclusive licensing, a two-part tariff is optimal. If fixed fee licensing is practicable, the licensor favors an exclusive licensing. Furthermore, an increase in quality difference within firms increases the optimal rates. Using the simulated results, we examine that licensing improves social welfare in all schemes, and the number of licensees will influence the magnitude of welfare enhancement.     

Employee share ownership in a unionised duopoly

Profit sharing schemes have been analysed assuming Cournot competition and decentralised wage negotiations, and it has been found that firms share profits in equilibrium. This paper analyses a different remuneration system: employee share ownership. We find that whether firms choose to share ownership or not depends on both the type of competition in the product market and the way in which workers organise to negotiate wages. If wage setting is decentralised, under duopolistic Cournot competition both firms share ownership. If wage setting is centralised, only one firm shares ownership if the degree to which goods are substitutes takes an intermediate value; otherwise, the two firms share ownership. In this case, if the union sets the same wage for all workers neither firm shares ownership. Therefore, centralised wage setting discourages share ownership. Finally, under Bertrand competition neither firm shares ownership regardless of how workers are organised to negotiate wages.