Formulas for Fair, Reasonable and Non-Discriminatory Royalty Determination

20 Pages Posted: 26 Jul 2012

See all articles by David J. Salant

David J. Salant

Toulouse School of Economics; Columbia University - Columbia Institute for Tele Information

Date Written: August 15, 2007

Abstract

This paper takes an axiomatic approach to determining “Fair, Reasonable, and Non Discriminatory” (“FRAND”) royalties for intellectual property (“IP”) rights. Drawing on the extensive game theory literature on “surplus sharing/cost sharing” problems, I describe specific formulas for determining license fees that can be derived from basic fairness principles. In particular, I describe the Shapley Value, the Proportional Sharing Rule and the Nucleolus. The Proportional Sharing Rule has the advantage that it is the only rule that is invariant to mergers and splitting of the IP owners. I also explain why, at times, there may be no acceptable to solution. Further, I contrast these rules with the Efficient Component Pricing Rule (“ECPR”) suggested by Baumol and Swanson. Unlike, the ECPR, the rules identified in this paper can uniquely determine license fees when there is more than one owner of essential IP, and also incorporate various notions of fairness and equity.

Suggested Citation

Salant, David J., Formulas for Fair, Reasonable and Non-Discriminatory Royalty Determination (August 15, 2007). TPRC 2007, Available at SSRN: https://ssrn.com/abstract=2117599

David J. Salant (Contact Author)

Toulouse School of Economics ( email )

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HOME PAGE: http://www.tse-fr.eu

Columbia University - Columbia Institute for Tele Information ( email )

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