Innovators charge companies that use their technology as a form of intellectual property by employing different contracting approaches. Licensing of the innovation during the usable duration of time that the producing company benefits for the technology introduces a difficult benefit and cost appropriation concept that requires a mathematical approach. In licensing, the factors that influence the cost and time allocation for the innovation form part of the technology transfer decision, two of the main ones including fixed fees and royalties. In the determination of the actual technology transfer charge and the actual duration of the charge, certain factors such as the type of technology, the type of industry and competitive environment contribute to the consideration of the appropriate charging method. Licensing considerations available to innovators highlight the various technology leakage impacts and the effect that the irregular transfer of the innovation has on the monopoly impact that a company enjoys in the market with several competitors. The basic assumption in the considerations is that there are many companies competing for the technology and the innovator seeks to find the most appropriate method to continue making revenue from the technology once sold (Raspudic 6).
Type of Contracts and Duration As mentioned above, the two types of contracts widely employed in licensing innovation to companies include fixed-fee and royalty payments. Despite the fact that the two licensing contracts have several similarities, distinctions however, stand between them in various fundamental perspectives. In the fixed fee alternative, the technology owner charges a fixed fee on the product and makes it available to all competing companies on take-or-leave basis of offer. In this contract perspective, meeting the initial fixed fee implies that the company agrees the offer and effectively gives the company the rights to use the technology as a license. In the determination of the fixed fee, the number of companies competing to take up the offer forms an integral determinant force. The concept of royalty arrangement finds shape on the unit output analysis where the innovator charges a specific predetermined royalty fee (Raspudic 4).
Licensees become beneficiaries of the technology if they meet the royalty fees. As employed in fixed-fee contracting, the number of licensees determines the amount of royalty charges. The determination of the active duration of a license depends on the type of contract up to when the technology utility reduces to an outdated product or leaks out to competitors’ hands. When the technology leaks, the innovator must extend its life through a second stint of operations where an updated version of the technology must enter the production system.
Licensing a second version of the technology introduces a concept of short-term and long-term usability of the technology, which apply in both fixed-fee contracts and royalty contracts.
Model to Determine the License of Choice and Duration
The mathematical model facilitates deliberating on the appropriate consideration to make in choosing a suitable licensing contract and its duration against a backdrop of competing factors. The model facilitates the determination of an optimal duration, which best captures the revenue earning concept that the innovator keenly follows to stay in business. Within a competitive environment where technology is a central factor of productivity, potential of innovation changes in the future, differentiation in industry needs and a variety of conditions for protection of intellectual property rights, the most suitable form of licensing may offer a difficulty to innovators. The model classifies technological advancements as destructive elements of innovation since licensing needs increase and make it difficult to hold onto licensees.
Advancements in technology or innovation, also referred to as technology leakage, drives intellectual property rights further away from the innovator and leave an irreversible mark. The preservation of intellectual property rights when technology advances gets to a difficult level since it is hard to track copying.
More than one company competes in the operations in which the technology functions. The model divides the life of the license contract into two main periods covering the entire chargeable duration. Period 1 includes four possible contract versions, two short-term and two long-term contracts each for fixed-fee and royalty licenses. The expiration of the first period leads to the introduction of second period that has a contract for fixed-fee and the royalty license. Period 1 license operates during the first period of operations of the company during which the technology assist the company to remain competitive in the market (Raspudic 7).
Continuous research and development counter expiration of the technology and deliver a newer version of the innovation that has a separate contractual agreement, leading to further competitive potential in the market. Certain considerations in the determination of duration and cost include the cost of monopoly that continues to decrease with contracts signed under every innovation. The cost of production depends on the nature of innovation during period one and two, where irreversibility and technology leakage determine setting of license fees and duration. Technology leakage leads to loss of revenue to the innovator since the monopoly cost reduces with technology leakages.
The cost of leaked innovation depends on the nature of leaked technology as well as the latest innovation information that the innovator possesses in order to devise the updated technology. Vertically integrated innovator does not face technology leakage and commitment emerges since the industry monopoly becomes easier with very innovation (Raspudic 10). Bertrand competition considers an environment where the profitability of the innovation best suits one of the competing companies. Fixed fee licenses best deliver results if one company enjoys exclusive rights on the innovation. Firms with lowest costs make meaning to the model and the absence of technology leakage changes the balance.
Fixed fee licensing is practical in cases where technology leakage is rampant and the investor incurs extra investment costs to mitigate losses. Innovation 2 after research and development makes sense to operations if it produces additional benefits in reducing competition. Long term and short term fixed-fee and royalty contracts deal with technology leakage differently. Royalty contacts have a better coverage of long term duration license needs than fixed contracts. Other contracts include valorem royalties that fit high technology industrial needs, two part tariffs with both fixed fees and royalties characteristics.