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 a dual licensing scheme that combines a first-price license auction with royalty contracts for losers. Prior to bidding firms observe imperfect signals of the expected cost reduction; after the auction the winning bid is made public. Bidders may signal strength to their rivals through aggressive bidding, which may however backfire and mislead the innovator to set an excessively high royalty rate. We provide sufficient conditions for existence of monotone bidding strategies and for the profitability of combining auctions and royalty contracts for losers

Auctioning Process Innovations when Losers’ Bids Determine Royalty Rates

We consider a licensing mechanism for process innovations that combines a license auction with royalty contracts to those who lose the auction. Firms’ bids are dual signals of their cost reductions: the winning bid signals the own cost reduction to rival oligopolists, whereas the losing bid influences the beliefs of the innovator who uses that information to set the royalty rate. We derive conditions for existence of a separating equilibrium, explain why a sufficiently high reserve price is essential for such an equilibrium, and show that the innovator generally benefits from the proposed mechanism

Horizontal mergers with synergies: first-price vs. profit-share auction

We consider takeover bidding in a Cournot oligopoly when firms have private information concerning the synergy effect of merging with a takeover target. Two auction rules are considered: standard first-price and profit-share auctions, supplemented by entry fees. Since non-merged firms benefit from a merger if the synergies are low, bidders are subject to a positive externality. Nevertheless, pooling does not occur; and the profit-share auction is strictly more profitable than the first-price auction, regardless of whether firms observe the synergy parameter or only the winning bid before they play the oligopoly game

Optimal bid disclosure in license auctions with downstream interaction

The literature on license auctions for process innovations in oligopoly assumed that the auctioneer reveals the winning bid and stressed that this gives firms an incentive to signal strength through their bids, to the benefit of the innovator. In the present paper we examine whether revealing the winning bid is optimal. We consider three disclosure rules: full, partial, and no disclosure of bids, which correspond to standard auctions. We show that more information disclosure increases the total surplus divided between firms and the innovator as well as social surplus. More disclosure also increases bidders’ payoff. However, no disclosure maximizes the innovator’s expected revenue

Start-Ups and Licensing Agreements: An Exploratory Case Study

Licensing agreements can exist between established companies but they increasingly also give rise to start-up companies, built around the licensed technology. Licensing-out technology can represent a risk as well as an opportunity for any licensor as there is a trade-off between additional revenues that can be gained from the licensing agreement and the costs related to the transfer itself, as well as the risks of opportunism by the licensee. When licensing to a start-up, this risk is higher, as start-ups have scarce resources, high failure rates and no past performance on which to gauge the start-up’s success. For the start-up the license could also represent a risk in the form of sunk costs and constraints on their evolution path. This paper discusses under which conditions technology licensing between a licensor and a start-up can be beneficial to both parties. Through a qualitative analysis, interviewing a number of European start-ups, we will examine in particular the role of contractual clauses, the relationship between licensor and licensee, the role of the licensed technology in the final product and the role of a technology push versus demand-pull scenario in a licensing deal. For all these aspects we will reflect on their influence on the licensor and licensee

Optimal bid disclosure in license auctions with downstream interaction

The literature on license auctions for process innovations in oligopoly assumed that the auctioneer reveals the winning bid and stressed that this gives firms an incentive to signal strength through their bids, to the benefit of the innovator. In the present paper we examine whether revealing the winning bid is optimal. We consider three disclosure rules: full, partial, and no disclosure of bids, which correspond to standard auctions. We show that more information disclosure increases the total surplus divided between firms and the innovator as well as social surplus. More disclosure also increases bidders’ payoff. However, no disclosure maximizes the innovator’s expected revenue

Reasons for Counseling Reasonableness in Deploying Covenants-Not-to-Compete in Technology Firms

Some states ban the enforcement of employee covenants-not-to-compete (“non-competes”) but most enforce them to the extent they are reasonable. As such, “reasonableness” provides the touchstone for enforceability analysis. The academic literature commenting on the reasonableness of non-competes is large and growing. Scholars usually direct their comments to judges, legislators, and other scholars. Rarely do they address practicing lawyers. That omission is particularly unfortunate because practicing lawyers, more than judges, legislators, and scholars, can affect whether non-competes work both fairly and effectively. This Article fills that void by providing reasons, directed to practicing lawyers, for deploying non-competes in a reasonable manner. It also addresses how the American Bar Association’s Model Rules of Professional Conduct and norms of lawyering that flow from them often set a tone for client counseling that makes it difficult to counsel clients toward reasonableness. The Article argues that failing to effectively counsel clients toward reasonableness, however, may actually amount to professional irresponsibility rather than the professional responsibility that the Model Rules seek to promote

Foreign Ownership and Market Entry

When a firm wishes to sell in a foreign market, it can do so either by exporting to that market or by investing in a local production unit. The latter mode of servicing a foreign market is referred to as a foreign direct investment (FDI). International production has increased rapidly during the last two decades, and particularly since the second half of the 1980s. This paper describes the facts, explains why firms choose FDI, and evaluates FDI in terms of impact on host economies. Particular emphasis is placed on firms’ choice between the two types of foreign investment; “greenfields”, which involves the establishment of a new production facility, and cross-border mergers and acquisitions, which involves taking over an existing production unit in a foreign market. The paper also contains a fairly extensive discussion of the consequences of economic integration on market entry.