Licensing Intellectual Property in the Presence of Non-Contractible Complements

23 Pages Posted: 3 Oct 2006

See all articles by Andrei Hagiu

Andrei Hagiu

Boston University - Questrom School of Business

Josh Lerner

Harvard Business School - Finance Unit; Harvard University - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Private Capital Research Institute

Date Written: October 2006

Abstract

This paper provides a simple model of licensing intellectual property to licensees who sell complementary products, revenues from which are at least partially uncontractible. When the licensor cannot use fixed fees, he prefers output-based royalties over profit-sharing agreements if the licensee's revenues from complements are not too high and if the fraction thereof that can be brought under the incidence of a licensing agreement is sufficiently large. The public policy implication is that, in such licensing contexts, there is a compelling case for broadening the ability of licensors to share in revenues from sales of adjacent products in order to allow for the internalization of externalities due to product complementarities. We illustrate our arguments with two case studies: licensing of printer technology to Dell and licensing of music to Apple Computer.

Keywords: license, patent, technology transfer

JEL Classification: K21, L22

Suggested Citation

Hagiu, Andrei and Lerner, Josh, Licensing Intellectual Property in the Presence of Non-Contractible Complements (October 2006). Available at SSRN: https://ssrn.com/abstract=934407 or http://dx.doi.org/10.2139/ssrn.934407

Andrei Hagiu

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

Josh Lerner (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6065 (Phone)
617-496-7357 (Fax)

HOME PAGE: http://www.people.hbs.edu/jlerner/

Harvard University - Entrepreneurial Management Unit

Cambridge, MA 02163
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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European Corporate Governance Institute (ECGI) ( email )

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Belgium

Harvard University - Private Capital Research Institute ( email )

114 Western Ave
Allston, MA 02134
United States

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