Per unit vs. ad valorem royalties under asymmetric information |
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| Affiliation: | 1. University of Wisconsin-Milwaukee, Milwaukee, WI, USA;2. School of International Trade and Economics, University of International Business and Economics, China;3. Hanqing Advanced Institute of Economics and Finance, Antitrust and Competition Policy Center, School of Economics, Renmin University of China, 59 Zhongguancun Street, Beijing 100872, China;1. Department of Economics, SUNY at Buffalo, Buffalo, NY 14260, United States;2. Department of Economics, National Chung Cheng University, Chia-yi County 621, Taiwan;1. Faculty of Economics, Kyoto Sangyo University, Motoyama, Kamigamo, Kita-Ku, Kyoto 603-8555, Japan;2. Institute of Social and Economic Research, Osaka University, 6-1 Mihogaoka, Ibaraki, Osaka 567-0047, Japan;3. Research Fellow of the Japan Society for the Promotion of Science (JSPS), Faculty of Economics, Kyoto Sangyo University, Motoyama, Kamigamo, Kita-Ku, Kyoto 603-8555, Japan |
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| Abstract: | We study an inside patent holder's optimal licensing policy when it has imperfect information about the value of the patent to its rival. The patent holder can choose any two-part licensing fee with either per unit or ad valorem royalties. We demonstrate that the equilibrium will be either a fully separating contract with different per unit royalty rates, or a contract with a single ad valorem royalty that excludes a high cost rival. Fixed fees will not be used. The presence of asymmetric information uniquely drives the per unit royalties that otherwise would not be adopted. Per unit royalties always generate higher social welfare than ad valorem royalties. |
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