On the Choice of Royalty Rule to Cover Fixed Costs in Input Joint Ventures

In a model where two competing downstream firms establish an input joint venture (JV), we analyze how different royalty rules for covering fixed costs affect channel profits. Under running royalties, the downstream firms’ perceived marginal costs are above the true marginal costs since fixed costs are incorporated. We find that tougher competition between the JV partners may actually increase channel profit under such a scheme. However, lump-sum royalties are preferable if the competitive pressure is weak.