Estimation of Patent Licensing Value Using a Flexible Demand Specification
1 August 2007
By Dr. Gregory K. Leonard with MIT Professor of Economics Dr. Jerry Hausman
A patent owner who is considering licensing its patent to a competitor faces a dilemma. By giving a license to the competitor, the patent owner stands to lose profits due to increased competition. In order to be willing to license, therefore, the patent owner must receive a royalty that at least compensates for these lost profits. The minimum acceptable royalty depends upon the competitive impact the potential licensee's product would have on the patent owner's product. In this article from the Journal of Econometrics, NERA Senior Vice President Dr. Gregory K. Leonard and MIT Professor of Economics Dr. Jerry Hausman examine how to estimate econometrically this competitive impact and how a patent owner might use this information to determine the minimum acceptable royalty. Dr. Leonard and Dr. Hausman discuss the advantages of using a flexible functional form for the demand system specification that underlies the competitive analysis. Finally, using an empirical example, the authors illustrate the large differences that can arise between results based on flexible forms versus non-flexible forms.
