Bargaining Power in the Market for Intellectual Property: Evidence from Licensing Contract Terms

56 Pages Posted: 16 May 2018 Last revised: 7 Oct 2019

See all articles by Gaurav Kankanhalli

Gaurav Kankanhalli

University of Pittsburgh - Katz Graduate School of Business

Alan Kwan

The University of Hong Kong

Date Written: August 1, 2018

Abstract

We study a novel database of intellectual property (IP) licensing agreements sourced from filings made by publicly-listed corporations, a large fraction of which firms (initially) disclose with redacted terms. In contrast to the benchmark that IP quality alone determines the pricing of IP, we argue that bargaining power plays a critical role and explains several patterns in observed royalty rates. Licensors with differentiated technology and high market power charge higher royalty rates, while larger-than-rival licensees pay lower royalty rates. Licensors command premium royalty rates for contractual features such as exclusivity. Finally, we employ this framework and setting to understand pricing implications of non-disclosure: licensors redact when they transact at lower royalty rates, consistent with preserving bargaining power for future negotiations. Our findings offer a new explanation for innovator secrecy and have several practical takeaways for transfer pricing and patent litigation.

Keywords: Intellectual Property Licensing, Bargaining Power, Disclosure

JEL Classification: O30, O32, O34, L24

Suggested Citation

Kankanhalli, Gaurav and Kwan, Alan, Bargaining Power in the Market for Intellectual Property: Evidence from Licensing Contract Terms (August 1, 2018). Available at SSRN: https://ssrn.com/abstract=3171920 or http://dx.doi.org/10.2139/ssrn.3171920

Gaurav Kankanhalli (Contact Author)

University of Pittsburgh - Katz Graduate School of Business ( email )

Pittsburgh, PA 15260
United States

Alan Kwan

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

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