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The Relevance of Bargaining for the Licensing of a Cost‐reducing Innovation*
Author(s) -
Sempere Monerris José J.,
Vannetelbosch Vincent J.
Publication year - 2001
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/1467-8586.00121
Subject(s) - negotiation , microeconomics , economics , duopoly , profit (economics) , cournot competition , context (archaeology) , fixed cost , paleontology , political science , law , biology
In the context of a Cournot duopoly, this paper studies the licensing of a cost‐reducing innovation by means of three possible allocation mechanisms: auction, fixed fee, and direct negotiation. Once the use of an arbitrary reserve price (which is not credible) has been excluded, it is no longer true that auction always yields higher profit to the patentee than a fixed fee. However, the authors propose a direct negotiation mechanism which restores the patentee’s profit to the level of an auction with an arbitrary reserve price (which is unimplementable). Direct negotiation is superior to both an auction with a nonarbitrary reserve price and a fixed fee. From the social point of view, however, licensing with a fixed fee is the best option.