Cuihong Fan

Licensing Process Innovations when Losers’ Messages Determine Royalty Rates

We consider a licensing mechanism for process innovations that awards a limited number of unrestricted licenses to those firms that report the highest cost reductions, combined with royalty licenses to others. Firmsʼ messages are dual signals of their cost reductions: the message of those who win an unrestricted license signals their cost reduction to rival firms, while losersʼ messages influence the royalty rate set by the innovator. We explain why a sufficiently high threshold level for awarding the unrestricted license is essential to induce truth-telling, show that the innovator generally benefits from the proposed mechanism, and derive conditions for implementability by a modified second-price auction.

Licensing a common value innovation when signaling strength may backfire

This paper reconsiders the licensing of a common value innovation to a downstream duopoly, assuming firms observe imperfect signals of the cost reduction induced by the innovation. The innovator adopts a direct revelation mechanism and awards an unrestricted license to the firm that reports the highest signal and a royalty contract to the other. Firms may signal strength to their rivals through exaggerated messages, which may however backfire, and give rise to higher royalty payments. We provide sufficient conditions for truthful implementation, and for the profitability of adding royalty contracts to what is otherwise a first-price license auction.

Procurement with Costly Bidding, Optimal Shortlisting, and Rebates

We consider the procurement of a complex, indivisible good when bid preparation is costly, assuming a population of heterogeneous contractors. Shortlisting is introduced to implement the optimal number of bidders, and we explore whether the procurer should reimburse the nonrecoverable cost of preparing a bid in whole or in part. We find that a reimbursement policy is profitable for the procurer only if performance and bidding costs are negatively correlated. Moreover, negative rebates (entry fees) always dominate positive rebates.

Research Joint Ventures, Optimal Licensing, and R&D Subsidy Policy

We reconsider the justifications of R&D subsidies by Spencer and Brander (1983) and others by allowing firms to pool R&D investments and license innovations. In equilibrium R&D joint ventures are formed and licensing occurs in a way that eliminates the strategic benefits of R&D investment in the subsequent oligopoly game. Nevertheless, governments subsidize their domestic firms in order to raise their bargaining position in the joint venture. This holds true regardless of whether governments offer either unconditional or conditional subsidies. This suggests an alternative explanation of the observed proliferation of R&D subsidies.

Optimal Licensing of Technology in the Face of (Asymmetric) Competition

We reconsider the optimal licensing of technology by an incumbent firm in the presence of multiple potential licensees. In a first step we consider the standard case of one license and show that competition among potential licensees has a drastic effect on optimal two-part tariff contracts. We also consider alternative mechanisms such as standard and more sophisticated menu license auctions, and design a dynamic mechanism that is more profitable. In a second step we allow the licensor to issue more than one license and introduce a globally optimal dynamic mechanism that extracts the maximum industry profit while reducing the potential licensees’ payoff to the minimum level that they can assure themselves. That mechanism awards licenses to all firms and prescribes maximum permitted royalty rates together with positive fixed fees.

To Spy or Not to (Fire the) Spy: Impact and Stability of Spying Out Rivals' Play in Bertrand Competition

We analyze the effect of espionage on pricing in a Bertrand market with substitutes. We explain why incomplete information is essential for a robust espionage equilibrium. Yet, under incomplete information espionage is not always profitable (the second-mover advantage may vanish) and we provide sufficient conditions for profitable espionage. Moreover, while the spied at firm suffers from espionage if its cost is low, firing the spy, which is an option if the spy has been exposed, adversely affects beliefs and never pays. Unlike the literature on espionage in entry games that relies on mixed strategies and complete information, the introduction of incomplete information allows us to focus on pure strategies.