Licensing Schemes in Endogenous Entry

Table 1: Main Assumptions

Following Kamien and Tauman (1986), the optimal license scheme for a license
holder has been considered in numerous papers. Kamien (1992) provides a useful survey
on this topic. The existing literature primarily focuses on comparing licensing by means
of a unit royalty and a fixed fee.³ Moreover, Sen and Tauman (2007) explore the optimal
combination of a fixed fee and a unit royalty. In their model, a fixed fee is determined
by auction; thus, the fixed fee is the winning bid of licensees. They show that as claimed
by Kamien and Tauman (1986), a fixed fee scheme is sufficient for monopoly profit and
that the optimal number of licensees is exactly one under a linear demand function.⁴
Table 1 is provided in order to elucidate the differences among the main assumptions
of this paper and those of Kamien and Tauman (1986), de Meza (1986), and Sen and
Tauman (2007).⁵

The rest of this paper is organized as follows: Section 2 introduces our model and
Section 3 presents the result. Section 4 discusses the case wherein the fixed fee is
regulated. Section 5 provides concluding remarks.

³Recently, Ino (2010) extends Kamien and Tauman (1986) by considering the general cost function
and the general demand function. He compares the unit royalty scheme and the fixed fee scheme with
a fixed number of licensees. He shows that a unit royalty scheme is superior to a fixed fee scheme when
the downstream market is sufficiently competitive.

⁴Sen and Tauman (2007) also consider a case wherein the license holders may produce goods
themselves. See also Wang (1998) for further discussion on so-called incumbent license holders, who
sell a license as well as produce goods.

⁵Note that since de Meza (1986) proves his proposition using only a figure, the assumptions of his
model are deduced from the figure.

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