Per-unit versus ad-valorem royalty licensing in a Stackelberg market

We consider licensing of a non-drastic innovation by a licensor that interacts with a potential licensee in a Stackelberg duopoly, comparing per-unit and ad-valorem royalty two-part contracts and showing why and when each licensing deal should be used. We contribute three findings to the literature. First, ad-valorem royalty is preferred when the licensor plays as leader in the marketplace, but per-unit royalty is preferred when the licensor plays as follower. Second, only innovations that do not hurt consumers are socially beneficial. Third, our model also suggests that both the licensor’s status as a leader or follower in the marketplace and the innovation size determine the incentive to engage in innovative activities.

The costly prestige ranking of scholarly journals

The prestige ranking of scholarly journals is costly to science and to society. Researchers’ payoff in terms of career progress is determined largely from where they publish their findings, and less from the content of their scholarly work. This fact creates perverted incentives for the researchers. Valuable research time is spent in trying to satisfy reviewers and editors, rather than spending their time in the most productive direction. This in turn leads to unnecessary long time from research findings are made until they become public. This costly system is upheld by the scholarly community itself. Scholars supply the journals with time, serving as reviewers and editors without any paycheck asked, even though the bulk of scientific journals are published by big commercial enterprises enjoying super profit margins. The super profit results from expensive licensing deals with the scholarly institutions. The free labour offered, on top of the payment for the licensing deals, should be viewed as part of the payment to these publishers – a payment in kind. Why not use this as a negotiating chip towards the publishers? If a publisher asks more than acceptable for a licensing deal, rather than walk away with no deal, the scholarly institutions could pull out all the free labour offered by reviewers and editors.

OUT-LICENSING IN MARKETS WITH ASYMMETRIC INFORMATION: THE CASE OF THE PHARMACEUTICAL INDUSTRY

Few large pharmaceutical companies have recently discovered out-licensing of terminated R&D results as a way to recoup some of the significant investments made in R&D and to improve R&D productivity. Our empirical investigation reveals that the licensing partners are preferably young, small and highly specialized companies. This reverses the traditional logic of out-licensing. While out-licensing is usually done because of downstream concerns, our analysis shows that the company which owns the necessary assets for further development (the large pharmaceutical company) sells the license to a firm (the small partner company) which has — at the time of deal closure — no track record to prove its ability to successfully develop the compound. As the lack of a track record does not allow the pharmaceutical company to distinguish between the partner firms based on their development capabilities, these out-licensing deals are characterized by an asymmetric distribution of information. The application of the theory of adverse selection allows deriving managerial recommendations along three dimensions of the out-licensing deal: product coverage, price setting and performance presumption. By making changes along these dimensions, R&D managers are able to reduce the information asymmetry and approximate an equilibrium in the out-licensing market.