Economic evaluation of remuneration from patents and technology transfers

One of the more critical and complex issues to be resolved between a would-be supplier (licensor) and recipient (licensee) of technological know-how is the determination of a fair transaction price. This price should reflect a number of factors, including the risk and return associated with the outcome of the technology. The model presented in this paper was derived for a discrete, one-period time frame. The model can be extended to a multi-period case. Since the qualitative results remain the same, we decided to focus on the one-period model. The model can also be extended to the case of the licensee's going bankrupt. Another extension is to allow both prices and quantities of the product to be stochastic. If prices and quantities reflect a constant elasticity of demand function, the analytical formulation can still be preserved. The incentives to select a specific royalty scheme will be a function of the elasticity of demand. We may expect to find different payment schedules for different products based on their elasticity of demand.