Selling Licenses for a Process Innovation : The Impact of the Product Market on the Selling Mechanism

This article considers the sale by a research lab of licenses for a cost-reducing innovation. The marginal cost of a firm that wins a license is private information and the acquisition of a license imposes a negative externality on the other firms. The lab's optimal revenue is determined from a class of mechanisms in which the lab selects the number of licenses and the reserve price before the sale. The role of the downstream product market in the determination of the number of licenses is analyzed. Furthermore, it is also shown that the optimal reserve price may be zero