SEMINAR 4 June, 2012: Yassine Lefouili, Toulouse School of Economics

Per-Unit Royalty vs Fixed Fee: The Case of Weak Patents

Abstract

This paper explores a licensor.s choice between charging a per-unit royalty or a fixed fee for an innovation covered by a weak patent, i.e. one that is likely to be invalidated by a court if challenged. Using a general (reduced-form) model of competition, we show that, independently of whether the patent holder is an industry insider or outsider, a per-unit royalty scheme dominates a fixed fee if the strategic effect of an increase in a potential licensee.s unit cost on the equilibrium industry profit is positive. The latter condition is shown to hold in a Cournot (resp. Bertrand) oligopoly with homogeneous (resp. differentiated) products under very general assumptions on the demands faced by firms. As a byproduct of our analysis, we contribute to the oligopoly literature by offering some new insights of independent interest regarding the effects of cost variations on Cournot and Bertrand equilibria.

Keywords: Licensing schemes, Weak patents, Patent litigation, Cost comparative statics.

JEL Classi.cation: D45, L10, O32, O34.