Licensing Intellectual Property in the Presence of Non-Contractible Complements

Intellectual Property

Article Snapshot


Andrei Hagiu and Josh Lerner


Working Paper, October 2006


This paper looks at how producers of intellectual capital are compensated for their products.

Policy Relevance

Limiting the kinds of fees that can be collected for a contribution of intellectual capital can discourage production of intellectual capital.

Main Points

  • Because of uncertainty, some intellectual property (IP) owners cannot agree with licensees ahead of time how much to pay. 


  • A firm’s revenues are due partly to licensed components, and partly from other related products (“complements”). An example is the licensing of digital music to Apple, or the licensing of proprietary software to an open source firm.


  • IP holders choose between a royalty based on output and revenue or profit-sharing arrangements.
    • Output based agreements are preferred if revenues from complements are low, and a significant fraction of revenues from the product are payable under the agreement.
    • Profit-sharing arrangements are preferred when revenues associated directly with the patented component are low.


  • IP owners should be able to share revenues from sales of any related products to capture more of the value from their investment.

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