Licensing Schemes in Endogenous Entry



Table 1: Main Assumptions

Kamien and
Tauman (1986)

de Meza (1986)

Sen and Tauman
(2007)

This Paper

Number of

Licensees

exogenous

endogenous

exogenous

endogenous

Licensing
Scheme

fixed fee or unit
royalty

two-part tariff
(unit royalty and
fixed
fee)

two-part tariff
(unit royalty and

auction)

two-part tariff
(unit royalty and
fixed
fee)

Cost

Function

constant

marginal cost

increasing
marginal cost

constant

marginal cost

constant

marginal cost

Demand

Function

linear

linear

linear

general

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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