DYNAMIC PATENT LICENSING

This paper shows one way a fixed fee can dominate an auction. If no one knows whether the innovation will succeed or not when it appears, and if its life exceeds the life of the patent, then selling one licence by fixed fee maximizes inventor profit for some probabilities of success. The reason is a nonlicensee is better off when a rival buys a license because this reveals the nature of the innovation. If it succeeds, the nonlicensee can adopt in the future. after the patent has expired. This expected future gain can outweigh the expected loss during the life of the patent.