A BEJEAP Topics article.

Abstract

We study an R&D game in which a research unit undertakes a (non-observable) research effort and, if an innovation is obtained, auctions licenses to a pool of producers. Each producer has a private valuation for the license and suffers a negative externality when a competitor becomes a licensee. We compare the optimal rule for the allocation of licenses and the level of research effort implemented by the innovator in two scenarios: free licensing by the innovator vs. optimal regulation. As long as the cost of public intervention is sufficiently low, free licensing induces two different types of inefficiencies: an excessively high price for licenses and a suboptimal dissemination of knowledge, and an excessively low research effort. This indicates that public intervention should combine the following measures: (i) an antitrust agency which limits the royalties that innovators can ask for a license, and (ii) a direct subsidy to research activity.

Submitted: November 9, 2005 · Accepted: July 11, 2006 · Published: August 7, 2006

Originally published in Topics in Economic Analysis & Policy.

Recommended Citation

Brocas, Isabelle (2006) "Designing Auctions in R&D: Optimal Licensing of an Innovation," Topics in Economic Analysis & Policy: Vol. 6 : Iss. 1, Article 11.
Available at: http://www.bepress.com/bejeap/topics/vol6/iss1/art11