Fixed-fee vs. royalty licensing under asymmetric demand information

Abstract

When there is asymmetry in the market size information held by an R&D firm outside a market that possesses new technology for lowering production costs, along with a monopoly firm that engages in production activities inside the market, the producing firm has an incentive to make its market size look smaller to reduce licensing fees. Fixed-fee licensing is desirable for R&D firms in the absence of information asymmetry, but royalty licensing and a mixture of fees and royalties can work as a means to resolve information asymmetry. Using a dynamic model of signaling, this study shows that fixed-fee licensing is adopted when the level of a new technology is large or small, while royalty licensing is adopted when the level is moderate.