Patent Licensing Regimes in Case of Imitation

By Fehmi Bouguezzi

English

This paper studies three modes of patent licensing: a fixed fee, a per unit royalty, and an auction in a Cournot market producing a homogenous good and containing three competing firms, where one holds a patent. The model supposes that the innovative firm owns a new technology allowing it to produce at a lower marginal cost. The key difference between the present model and models in the existing literature is that here we presuppose the existence of an imitation risk for the patented innovation. In fact, in situations with no licensing, a non-innovative firm will try to imitate the new technology of the innovative firm up to a given imitation level. Results show that the optimal licensing regime for an innovative firm depends on the magnitude of innovation compared with imitation. In fact, when innovation is not drastic compared with imitation, licensing by means of royalties is better for the innovative firm while no licensing is the best strategy for an innovative firm when innovation is drastic. The paper also finds that consumer surplus and total surplus are better with a fixed fee or an auction licensing regime, while a licensing regime by means of a per-unit royalty is the worst licensing strategy for both consumers and total surplus. JEL codes: C72, D45, L24, O31, O32, O34

Keywords

  • patent
  • technology transfer
  • process innovation
  • licensing regime
  • imitation
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