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Cooperation in R&D: Patenting, Licensing, and Contracting

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Game Theory and Business Applications

Part of the book series: International Series in Operations Research & Management Science ((ISOR,volume 194))

Abstract

Innovative activity uses anihd produces knowledge. This is both costly and risky and the resulting product has (at least partially) the main characteristics of a public good: it is non-rival and non-excludable. Without any sort of protection, individual agent would have little incentive to do research for fear of unsuccessful research effort or for fear of imitation by others (through spillovers or free access).

In this chapter, we use game-theoretic concepts to analyze R&D collective arrangements in settings involving both complete and incomplete contracts. The first topic is patent protection and the comparison of the main forms of licensing in various industry contexts, structures or sizes – including the role of various factors such as product differentiation, innovation magnitude, and asymmetric information. The second focus is the long-debated relationship between innovative activity and the intensity of competition. Here, we review the benefits of various types of cooperative R&D agreements in the presence of externalities. The last two topics concern contracting issues. In a complete contracting setting, we review the design of licensing mechanisms allowing for full knowledge sharing under incomplete information. Finally, we consider incomplete contracts designed to deal with cumulative or sequential innovation and the associated moral hazard problems combining research and development efforts, and the possibility of several buyers for the innovation.

Sadly Sudipto Bhattacharya passed away while this chapter was being completed. As a friend and co-author, he has been a constant source of inspiration.

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Notes

  1. 1.

    In the early literature, see also Gallini (1984), Gallini and Winter (1985), Katz and Shapiro (1987), Muto (1987) and Rockett (1990a). See Kamien (1992) for an excellent review of the early literature. Some recent papers include Choi (2001), Filippini (2002), Erkal (2005a), Liao and Sen (2005), Erutku and Richelle (2006), Giebe and Wolfstetter (2008) and Martin and Saracho (2010).

  2. 2.

    See Stamatopoulos and Tauman (2008) for the analysis of licensing of innovations that lead to better product quality for firms.

  3. 3.

    It is optimal for the innovator to choose an upfront fee to extract the maximum possible surplus from the licensees. The best way to do this is through an auction. As shown in Katz and Shapiro (1985) and Kamien and Tauman (1986), an auction generates more competition that increases the willingness to pay for a license, compared to a flat upfront fee.

  4. 4.

    See also Marjit (1990) and Wang (2002) for other issues pertaining to incumbent innovators.

  5. 5.

    A cost-reducing innovation is drastic (Arrow 1962) if it is significant enough to create a monopoly with the reduced cost; otherwise it is non-drastic. An incumbent innovator of a drastic innovation has no incentive to license its innovation, since it can earn the entire monopoly profit with the reduced cost by using the innovation exclusively. In any industry of size two or more, an outside innovator of a drastic innovation can also earn the monopoly profit by selling the license to only one firm through an auction. See Sen and Stamatopoulos (2009a) for the complete characterization of optimal licensing policies for an outside innovator of a drastic innovation.

  6. 6.

    Dasgupta and Stiglitz (1980) point out that innovation may vary inversely with concentration when concentration is high.

  7. 7.

    Here the concentration effect is due to the gap between markets shares of successful and unsuccessful firms not to the reduction of the number of firms as in van de Klundert and Smulders (1997).

  8. 8.

    See Martin (2002).

  9. 9.

    Katz’s (1986) analysis is based on the notion of “stable cartel” as defined by d’Aspremont et al. (1983). Membership decisions consitute a Nash equilibrium.

  10. 10.

    See De Bondt (1996, p. 4) and Martin (2002, p. 462, fn 32).

  11. 11.

    In most other studies of cooperative R&D under uncertainty, the difficulty of imitation is measured by the length of the period of protection. For an example and references to this literature see Erkal and Piccinin (2010).

  12. 12.

    Clearly if product market competition is very tough, like in the Bertrand regime, a firm can only have an incentive to invest in R&D if by doing so it can gain a cost advantage.

  13. 13.

    For example see Hart and Moore (1994).

  14. 14.

    See also the research by Hopenhayn et al. (2006)

  15. 15.

    The second sale may or may not be socially optimal. On the one hand, it may create competition in the product market and therefore increase final customers’ consumer surplus. On the other hand, if it reduces the joint surplus of the original researcher and developer, it may undermine the incentives to invest in the quality of innovation.

  16. 16.

    See also Anton and Yao (2004) for an analysis of related tradeoffs in the context of cost-reducing inventions.

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Authors and Affiliations

  1. Department of Finance, London School of Economics, London, UK

    Sudipto Bhattacharya

  2. CORE, Universite Catholique de Louvain, Louvain-la-Neuve, Belgium

    Claude d’Aspremont

  3. New Economic School (Moscow), Moscow, Russia

    Sergei Guriev

  4. Department of Economics, Ryerson University, Toronto, ON, Canada

    Debapriya Sen

  5. Department of Economics, Stony Brook University, Stony Brook, NY, USA

    Yair Tauman

  6. Arison School of Business, IDC Herzliya, Herzliya, Israel

    Yair Tauman

Authors
  1. Sudipto Bhattacharya
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  2. Claude d’Aspremont
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  3. Sergei Guriev
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  4. Debapriya Sen
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  5. Yair Tauman
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Correspondence to Claude d’Aspremont .

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Editors and Affiliations

  1. , Department of Economics, Pennsylvania State University, University Park, 16802-3306, Pennsylvania, USA

    Kalyan Chatterjee

  2. , School of Management, Boston University, Commonwealth Ave. 595, Boston, 02215, Massachusetts, USA

    William Samuelson

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Bhattacharya, S., d’Aspremont, C., Guriev, S., Sen, D., Tauman, Y. (2014). Cooperation in R&D: Patenting, Licensing, and Contracting. In: Chatterjee, K., Samuelson, W. (eds) Game Theory and Business Applications. International Series in Operations Research & Management Science, vol 194. Springer, Boston, MA. https://doi.org/10.1007/978-1-4614-7095-3_10

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