Author(s)
Andrei Hagiu and
Josh Lerner
Source
Working Paper, September 2007
Summary
This paper looks at how producers of intellectual capital are compensated for their products.
Policy Relevance
Limiting the kinds of fees that can be collected for a contribution of intellectual capital can discourage production of intellectual capital.
Main Points
- Because of uncertainty, some intellectual property (IP) owners cannot agree with licensees ahead of time how much to pay.
- A firm’s revenues are due partly to licensed components, and partly from other related products (“complements”). An example is the licensing of digital music to Apple, or the licensing of proprietary software to an open source firm.
- IP holders choose between a royalty based on output and revenue or profit-sharing arrangements.
- Output based agreements are preferred if revenues from complements are low, and a significant fraction of revenues from the product are payable under the agreement.
- Profit-sharing arrangements are preferred when revenues associated directly with the patented component are low.
