Estimation of patent licensing value using a flexible demand specification |
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Authors: | Jerry A Hausman Gregory K Leonard |
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Institution: | 1. Massachusetts Institute of Technology, Cambridge, MA 02139, USA;2. NERA Economic Consulting, One Front Street, San Francisco, CA 94111, USA |
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Abstract: | A patent owner who is considering licensing its patent to a competitor faces a dilemma. By giving a license to the competitor, the patent owner stands to lose profits due to increased competition. In order to be willing to license, therefore, the patent owner must receive a royalty that at least compensates for these lost profits. The minimum acceptable royalty depends upon the competitive impact the potential licensee's product would have on the patent owner's product. We describe how to estimate econometrically this competitive impact and how a patent owner might use this information to determine the minimum acceptable royalty. We discuss the advantages of using a flexible functional form for the demand system specification that underlies the competitive analysis. Finally, using an empirical example, we illustrate the large differences that can arise between results based on flexible forms versus non-flexible forms. |
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Keywords: | C33 L24 O34 |
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